Appropriations vs. Cash: A Crucial Distinction

11 Jul

The distinction between having cash in a particular fund and having an appropriation in a fund is a crucial distinction that is often confused. Both are needed before money can be spent from a fund. Neither is enough by itself.  Let’s consider the distinction:

Having cash in a fund is just like having money in a bank account. Cash can come into a fund from various sources — taxes, sales of government services, fees, etc. Once it is deposited into a fund, it sits there in a fund until it is spent, just like money in a bank account.

Example: A county could create a Dog License Fund and designate all fees from mandatory dog licenses to to into the Dog License Fund. As dog license fees are received by the county, they would be deposited into the Dog License Fund, and its balance would grow over time, until the money was spent.

Appropriation, on the other hand, is simply official permission to spend money out of a fund. In Indiana, each unit of government has a designated fiscal body which is required to provide that permission to spend; for cities, it is the city council, for counties the county council, for townships the township board, etc.  Appropriations are most typically performed during the annual budget process; however, from time to time fiscal bodies will find it necessary to appropriate additional funds after a budget year has begun (e.g., for unexpected expenses). These appropriations are called additional appropriations. In most cases, appropriations only last until the end of the budget year (the calendar year), after which they expire.

Example: The County Council could appropriate $1000 from the Dog License Fund to the Sheriff, to provide training to animal control officers. This appropriation would provide the Sheriff permission to spend $1000 out of the Dog License Fund, if the cash is available in the fund, to provide training to animal control officers.

It is probably clear by now that two things are required before a government official can spend money out of a fund: the cash must actually be there in the fund AND the official must have an appropriation from the fund. Neither is useful by itself. If cash is in a fund, it just sits there until it is appropriated and spent. But without the cash, an appropriation is worthless — although there is permission to spend, there may be no money in the fund to spend! Note that it is perfectly acceptable to appropriate more money than there actually is in a given fund — until the money is there, though, the appropriation is worthless; despite the appropriation (permission to spend) there is nothing there to spend!

Example: The County Council creates a new Dog License Fund, and designates all fees from dog licenses to go into the Dog License Fund. It also appropriates $1000 out of the fund to the Sheriff for training for animal control officers. At the beginning, before any dog license fees are deposited into the fund, the appropriation is essentially worthless. Although the Sheriff has permission to spend up to $1000 for training, until the fees are actually deposited into the fund, there is nothing to spend. After the fees start to build up in the fund, the Sheriff may start spending the money on training. Note that there may not be enough cash in the fund to support the entire appropriation. For example, let’s say dog license fees only generate $700. Even though the Sheriff has $1000 of appropriations in the fund, if there is only $700 available in the fund, she or he would only be able to spend $700 on training. Conversely, say the dog license fees generated $2000 in revenue that was deposited into the Dog License Fund. The Sheriff still only has $1000 in appropriations, and can therefore only spend up to $1000 on training.

A couple of other notes about appropriations and cash:

  • There are times in which the fiscal body may appropriate more than is available in a fund. This occurs particularly in funds that are supported by revenue sources that are uncertain — for example, fees, fines, building permits, planning fees, etc. The fiscal body may want to appropriate funds only once a year during the annual budget-setting process — but the official who has the appropriation can still only spend the appropriation when the cash is actually available in the fund. To reiterate — there is nothing wrong with this. This is NOT overspending or overdrafting, or anything like that; even with an appropriation an official can’t actually spend money that isn’t there to be spent.
  • An appropriation is permission to spend, it isn’t a requirement to spend. Just because a fiscal body appropriates money for a particular function does not mean that the official with the appropriation has to spend the appropriation (absent some other statutory requirement to spend the appropriation). For a particularly silly hypothetical example, let’s say that the County Council decides to appropriate $10,000 in a fund to the Sheriff for clown therapy in the jail. The Sheriff might decide that clown therapy is a waste of money and decline to spend the appropriation. An appropriation is not required to be spent.

Hopefully this helps clarify an important distinction that is often confused in media reporting and popular discussion about government finance.

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One Response to “Appropriations vs. Cash: A Crucial Distinction”

  1. Eric Schmitz August 14, 2012 at 8:18 pm #

    I’ve now shared this with several people. It’s a great explanation of a concept that is not really that complicated, but can seem counter-intuitive in some cases. I think it’s particularly good resource for elected officials who need to explain it all to interested constituents. I’ve been asked about it, and this helped me at least stumble through an answer – a bar I don’t always get over. 😉

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