Common examples of internal service funds include a central motor pool that maintains the government’s vehicles, a consolidated information technology operation, a self-insurance pool for health benefits or workers’ compensation, a central print shop, and a supply warehouse. Governments also use internal service funds (ISFs) for facilities maintenance, mail and courier services, telecommunications, and benefits administration. Each one operates like a small in-house business that bills other departments for what they use and covers its own costs from those billings.
What an Internal Service Fund Is
An ISF is a proprietary fund established under Governmental Accounting Standards Board (GASB) guidance to finance goods or services one department provides to other departments on a cost-reimbursement basis. The goal is to break even, not turn a profit. Revenue comes entirely from internal billings rather than taxes or fees paid by the public.
That internal focus is what separates an ISF from an enterprise fund. Enterprise funds cover services sold to outside customers, like a municipal water utility or a public transit system. GASB says a government should use an ISF only when the government itself is the predominant user of the service; if outside customers account for most of the activity, the fund belongs in an enterprise fund instead.
Central Motor Pool and Fleet Maintenance
A motor pool ISF is one of the oldest and most widespread examples. The fund buys, maintains, fuels, and eventually replaces every vehicle in the government’s fleet. Departments that use those vehicles pay the motor pool a charge based on mileage, hours of use, or a flat monthly rate, and those charges become the fund’s revenue.
Billing rates for a motor pool usually include three components: the day-to-day cost of fuel, parts, and mechanic labor; a charge for depreciation on the current vehicle; and a surcharge that builds a reserve for future vehicle replacement. The replacement surcharge matters because depreciation alone rarely keeps pace with rising vehicle prices. Separating these pieces in the rate shows administrators exactly how much goes to operations versus how much goes toward replacing aging equipment.
A practical picture: the public works department is billed for every mile its dump trucks travel, while the building inspections division pays a monthly lease rate for its sedans. Both charges flow into the motor pool ISF, which uses the revenue to run the garage, pay mechanics, buy fuel in bulk, and set aside funds for the next round of vehicle purchases.
Information Technology Services
Governments that centralize IT into an ISF typically roll data centers, network infrastructure, cybersecurity, software licensing, and help desk support into a single fund. The fund then bills every department for what it consumes.
Allocation methods vary. Some governments charge a flat rate per employee, treating headcount as a reasonable proxy for IT resource use. Others bill based on more granular measures like the number of devices supported, help desk tickets submitted, or server capacity used. Larger governments sometimes use a hybrid: a per-employee charge for baseline services like email and network access, plus variable charges for specialized resources like database hosting or application development hours.
The IT model works well for expensive, shared infrastructure. A single department could never justify the cost of an enterprise firewall or a redundant data center on its own. Spreading that cost across every department through an ISF makes the investment manageable, and each department’s budget then reflects its share of the technology it depends on.
Self-Insurance and Risk Management
Many governments choose to self-insure rather than buy commercial policies for employee health benefits, workers’ compensation, or general liability claims. A self-insurance ISF collects premium-like charges from every department, pools those funds, and pays claims as they arise.
Premiums charged to each department are based on actuarial estimates of that department’s risk profile. A department with a large workforce doing physically demanding jobs will pay more per employee into the workers’ compensation ISF than a department of desk workers. When claims are filed, the ISF pays the medical provider or the injured employee directly from the pool.
GASB Statement No. 10 specifically addresses risk financing and provides that when a government uses a single fund for its risk financing activities, that fund should be either the general fund or an internal service fund. Self-insurance ISFs often carry significant liabilities for incurred-but-not-yet-reported claims, which makes their actuarial assumptions and reserve levels a frequent focus of external auditors.
Central Printing and Duplicating
A printing ISF houses industrial-grade copiers, large-format printers, binding equipment, and the staff to operate them. Departments submit work orders and get billed per impression, with rates varying by color, paper stock, and finishing. This keeps every department from independently leasing expensive equipment that would sit idle most of the day.
High-volume users like the elections office or the clerk’s office drive most of the revenue. The fund uses that revenue to cover paper inventory, toner, equipment depreciation, and staff salaries. As governments shift more communication online, some printing ISFs have expanded into digital design and mail processing to stay viable.
Central Stores and Supply Warehousing
A central stores ISF maintains a warehouse of commonly used items like office supplies, cleaning products, and standardized maintenance parts. Departments draw from the warehouse as needed instead of placing their own small purchase orders with outside vendors.
The fund charges a markup over acquisition cost to cover warehousing, handling, and inventory management. Bulk purchasing power is the main advantage: the government negotiates volume discounts that no single department could get on its own. The parks department requisitioning cleaning supplies and the courthouse ordering printer paper both pay the central stores ISF, and those charges keep the warehouse running.
Other Common Internal Service Funds
The five examples above are the most frequently encountered, but governments create ISFs for any centralized service where cost tracking matters. Other common ones include:
- Facilities maintenance and building management, covering custodial services, HVAC repair, and building upkeep across all government-owned properties, usually billed based on square footage occupied.
- Mail and courier services, providing centralized mail processing and interdepartmental delivery, billed by piece or by weight.
- Telecommunications, managing phone systems, mobile devices, and internet connectivity as a shared service, typically billed per line or per device.
- Employee benefits administration, separate from self-insurance, covering the overhead of administering benefit programs, processing enrollments, and managing vendor relationships.
What These Examples Have in Common
The common thread across every ISF is that the service benefits multiple departments, lends itself to standardization, and produces measurable units of consumption that can drive a fair billing rate: a mile driven, a help desk ticket, a claim paid, a page printed, a case of paper pulled from the shelf. Centralizing the service into an ISF forces each department to see what it actually costs to use it. When the police department gets a bill for fleet maintenance or the parks department pays for IT support, the full economic cost shows up in that department’s budget rather than sitting hidden inside a lump-sum general fund appropriation.
One boundary worth flagging: a fund set up mainly to serve outside customers is not an ISF, even if a few internal departments also use it. Under GASB, that fund belongs on the enterprise side. The ISF label is reserved for services where the government itself is the predominant user.