Interfund transfers: a credit perspective.

• Author: Cox, William J., Jr.

Policies and practices concerning transfers from a municipally owned enterprise fund to the general fund give credit analysts important insights into a city's fiscal and political environment.

In times of economic or financial stress, policy makers often look to outside sources to fill the revenue gap between what the public demands in services and what it may be willing to accept in the form of new taxes. Transferring cash from enterprise funds to general governmental funds is frequently a tempting option to satisfy such revenue requirements. Transfers do not come free of costs or risk, however. Before choosing the transfer option, policy makers should fully explore the long-term implications for all of the affected funds and enterprises. Typically, some form of well-researched, flexible, consistent and well-communicated transfer policy will enhance credit quality. Alternatively, having no specific policy will likely lead to difficulty.

Transfers usually take the form of funds moving from an enterprise to a general fund account. Large dollar amounts are involved in some instances, as in transfers from cities' airport, port and electric-system enterprises; but the issues and concerns apply similarly to cities that own only water or sewer enterprises, where transfers may be on a smaller scale.

Impact of Transfers

Transfers from enterprise funds to general government funds typically allow a city to enjoy a higher level of spending and/or a lower rate of taxation than it would otherwise be able to afford, given its tax base and political environment. In many communities, the primary reason for owning some types of enterprises historically was to transfer profits and subsidize tax rates--a reasonable idea, given the cost savings that can be achieved by financing enterprise infrastructure on a tax-exempt basis. An additional benefit of owning and transferring from an enterprise is the ability to capture revenues from otherwise tax-exempt properties such as state, federal or university facilities that require city services but do not pay city taxes.

In the age of downsizing, belt-tightening and reinvention of government, however, there is growing public sentiment towards delivering services at the least cost possible. Services delivered by municipal enterprises are isolated relatively easily from other city services and can be identified clearly with the cost and benefits of delivery.

In a least-cost environment, transfers are less likely to be viewed as a reasonable idea and more likely to be viewed as an indirect way of taxation. This perspective is found especially among large users of the...