An agency fund is an assemblage of funds that one government agency holds on behalf of another government agency. These funds typically arise when it is more efficient for one fund to collect cash on behalf of other funds, either through fund raising activities, billings, or tax collections, and then distribute the funds elsewhere. It would be much more expensive for the downstream funds to collect the cash on their own, since they would need to pay for additional administrative staff in order to do so.

Example of an Agency Fund

A state’s Department of Revenue is tasked with collecting sales tax from businesses across the state. Many local governments within the state—cities, counties, and special districts—are entitled to a share of these sales tax collections. Rather than requiring each local government to collect its own taxes, the state acts as a central collector through an agency fund. Businesses remit all their sales tax payments to the state, which then holds the funds in trust, keeping them separate from the state’s general revenues.

The Department of Revenue tracks how much tax is owed to each locality based on where the sales occurred. At regular intervals—monthly or quarterly—the state distributes the appropriate amounts to the local governments. During this process, the agency fund serves as a pass-through mechanism: the state never claims ownership of the tax revenue but simply acts as a steward, ensuring accurate and timely distribution.

This setup reduces administrative costs and complexity for both businesses and local governments. It also improves consistency in tax collection and reporting. Because the state already has the infrastructure in place to manage tax administration, using an agency fund streamlines the process and avoids duplication of efforts. This is a clear demonstration of how agency funds help promote efficiency, transparency, and accountability in government financial operations.