By Michelle Lofton and Mikhail Ivonchyk
Working capital management is a managerial strategy that monitors and uses current assets (e.g., cash, accounts receivable, and inventory) and current liabilities (e.g., accounts payable and notes payable) to ensure smooth operations. The purpose is to maintain cash flows for liquidity to meet short-term operating expenses and obligations. This integral part of sound financial management uses a variety of strategic tools to manage cash flows. These can include the use of unrestricted cash, savings, interfund borrowing, interfund transfers, delaying payments, receivables, a line of credit, direct lending arraignments, and short-term debt. Yet, little academic research on governments has evaluated the process for selecting different tools, the policies governments have in place to implement them, and the consequences of using one tool over another.
In our research study, we evaluate one working capital management strategic tool: interfund transfers. Interfund transfers are defined as flows of assets (such as cash or goods) without equivalent flows of assets in return and without a requirement for repayment. There are several purposes for interfund transfers such as subsidizing operations, upholding statutory spending requirements, supporting capital projects, and paying for debt service. For example, a public manager can use interfund transfers to move money from the General Fund, the primary fund used for government activity, to a Capital Project Fund to help pay for the construction of a new government administrative building.
Furthermore, public managers might find it useful, especially during periods of low cash balances or even shortages, to transfer between government funds since there is no requirement for interest to be paid or external parties to be involved. Yet, public managers can only use interfund transfers if they are legally allowed, authorized, and fully disclosed in financial statements. The legal allowance and authorization can be recognized through a formal policy created to govern practices. Many governments, therefore, have interfund transfer policies established that regulate the process of using interfund transfers to prevent arbitrary manipulation and misuse of public resources. For example, Augusta-Richmond County, Georgia’s interfund policy states “The Administrator and Finance Director are authorized to transfer budget amounts within and between departments, with the exception of transfers which increase salary appropriations. The Augusta, Georgia Commission may transfer amounts between funds and approve appropriations of additional resources.” Even with a formal policy, a financial manager must comprehensively disclose interfund transfer activity separately in financial statements. For instance, Dawson County, Georgia indicates in their 2019 Comprehensive Annual Financial Report that transfers are used to “1) supplement operating budgets, 2) help fund construction projects and debt service, and 3) move the County’s matching portion on federal and state grants.”
Our study posits that more professional financial managers, measured as full-time chief financial officers, will be more likely to navigate the use of interfund transfers and more willing to utilize greater amounts of this strategy. We test this hypothesis using a sample of all 159 counties in the state of Georgia from 2010 through 2017 and find this to be indeed the case. More specifically, we find that full-time chief financial offers are more likely to use interfund transfers and to transfer larger amounts than their part-time counterparts. This finding applies to the General Fund as well as total governmental funds.
The utility of these findings will vary from government to government depending on the ease of accessing interfund transfers due to the strictness of their governing policies. However, if such transfers are permitted, our findings indicate that a full-time chief financial officer is more likely to utilize this strategy. This can translate into real savings as interfund transfers may remedy temporary cash shortages eliminating the need for the use of other working capital management strategy tools such as direct lending and short-term debt. Arguably, active, full-time professionals may be costlier than part-time employees, so the net benefit of a full-time administrator should be assessed in the light of unique circumstances of the individual government. Yet, one additional benefit found is the wider array of working capital management strategies used, interfund transfers, which could add to the net benefit of hiring a full-time chief financial officer.
For practitioners, the use of interfund transfers is a viable strategy for prudent cash flow management. This strategy can be beneficial along with other types of cash flow management strategies such as the use of unrestricted cash, accessing prior savings, and issuing short-term debt. Governments with full-time chief financial officers are more likely to access this strategy, but it can be beneficial for different sized local governments, regardless of managerial capacity. If a government legally allows, authorizes, and fully discloses interfund transfers, it might be an ideal strategy to use to aid in sustaining government operations.
This is adapted in part from a Public Budgeting & Finance journal article by Michelle L. Lofton and Mikhail Ivonchyk entitled “Financial manager professionalism and use of interfund transfers: Evidence from Georgia counties.” Michelle L. Lofton is an assistant professor in the Department of Public Administration and Policy at the School of Public and International Affairs at the University of Georgia. Her research investigates public finance, public budgeting implementation, public working capital management, and fiscal institutions. Mikhail Ivonchyk is an assistant professor in the Department of Public Administration and Policy at the Rockefeller College of Public Affairs and Policy at the University at Albany. His teaching and research interests are in the areas of public finance, debt management, fiscal policy, budgeting process and agenda setting.