Chapter 6 - Trust Funds, Grants and Other Special Funds
Distinguishing between Trust Funds and Gifts
A Municipality’s Authority to Hold Trust Funds
Board of Commissioners of Trust Funds
The Board of Selectmen as Trust Fund Commissioners
The Treasurer and the Trust Fund Commissioners
Cemetery Commissioners and Perpetual Care Funds
Library Trustees and Gifts to Libraries
Municipal Trust Funds when the Principal is not in the Custody of the Community
Investment of Trust Funds in the Custody of the Treasurer
Unemployment Compensation Fund
Scholarship Fund or Education Fund
Elderly and Disabled Taxation Fund
Trust Funds, Grants and Other Special Funds
Municipal officers and departments may accept gifts or grants of money from governmental or charitable entities, private corporations and/or individuals. Gifts or grants to school departments must be accepted under the provisions of Ch. 71 §37A; gifts to other municipal departments must be accepted under the provisions of Ch. 44 §53A. Expenditure of gifts or grant monies does not require the approval of the appropriating authority. Rather, such monies may be expended without further appropriation, so long as the expenditure is for the purpose(s) of the gift or grant. Expenditure requires, however, approval of the mayor and council in cities and of the selectmen in towns. Expenditure of gift or grant funds by a school department requires approval of the school committee.
The accounting officer should segregate individual gifts and grants in the municipality's accounting records. Interest accruing on a gift or grant account remains with and becomes part of the account only if the donor or grantor expressly so provided in writing at the time of making the gift or grant.
Trust Funds vs. Gifts
An outright gift to a municipality involves the direct transfer of all interest in the gift property to the city or town at the time of making the gift. A gift in trust, on the other hand, entails an ongoing gift to support a specified purpose, program or activity if the municipality.
A person making a gift to a city or town generally places some limit on the expenditure of the principal of the gift, perhaps limiting expenditure to the interest, alone.
A person bestowing a gift in trust may make an inter vivos gift, making the gift effective during the donor's lifetime. Alternatively, the person may bestow a testamentary gift, giving the money as a bequest in a will and making the gift effective after his or her death. Whether a gift in trust is made as a testamentary or inter vivos gift, the person making the gift generally will, in writing, (a) specify the purpose(s) for which the monies may be expended and (b) define the powers and duties of the trustee.
The treasurer should deposit all monies given in trust to a city or town in separate fiduciary accounts and should administer them in a trustee capacity in accordance with the written directions of the donor.
Distinguishing between Trust Funds and Gifts
If a donor's written directions make clear an intent to establish an ongoing fund to support a specified program or activity, then the gift should be treated as a trust. A donor who restricts expenditures to interest accruing on the gift clearly manifests such an intent. However, donors do not always make their intent so clear. Accordingly, treasurers must exercise care in ascertaining a donor's intent. In the case of significant donations, treasurers should request assistance from the municipality’s counsel. Ultimately, only donations not intended to establish ongoing funds, but intended to be expended within a limited period of time, should be treated as gifts, pursuant to Ch. 44 §53A.
A Municipality’s Authority to Hold Trust Funds
Massachusetts law expressly permits cities and towns to accept gifts and bequests in trust for such purposes as supporting schools, war memorials, libraries, cemeteries, charities, and scholarships. For example:
In managing trust funds, a treasurer will encounter numerous legal terms relating to trusts. The following definitions from Black’s Law Dictionary, 7th. Ed., will assist in interpreting the meaning of these terms:
| • Bequest | Property, (usually personal property other than money) disposed of in a will. |
| • Beneficiary | One designated to receive something as a result of a legal arrangement. |
| • Devise | Property, (usually real property) disposed of in a will. |
| • Donation | A gift. |
| • Donative Trust | A trust requiring no payment of consideration by a beneficiary. |
| • Donee | One to whom a gift is made. |
| • Donor | One who gives something without receiving consideration from the transfer. |
| • Gift | The act of voluntarily transferring property to another without consideration. |
| • Settlor | A person who makes a settlement of property; esp., one who sets up a trust. |
| • Testamentary | Pertaining to a will or testament. |
| • Trust | A fiduciary relationship regarding property and subjecting the person with title to the property to equitable duties to deal with it for another's benefit. |
| • Trustee | One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary. |
| • Trust Fund | The property held in trust by a trustee. |
If a treasurer determines that the designated purpose of a trust fund is no longer feasible, the treasurer should consult with the municipality’s legal counsel about invoking the cy pres doctrine. Under this doctrine, if a trust's purpose cannot be accomplished because circumstances have changed after the trust was created or for any other reason, a court may alter specific provisions of the trust, so long as the alteration enables attainment of the general objective of the person who created it.
The General Laws of Massachusetts include a number of provisions governing the administration of trust funds and assigning administrative responsibility to several parties. For example:
Board of Commissioners of Trust Funds
“Any city or town, except Boston, may create a board of commissioners of trust funds, consisting of three persons who shall have the management of all trust funds given or bequeathed for the benefit of the town or the inhabitants thereof, unless the donor in making the gift or bequest shall otherwise provide. In cities the commissioners shall be appointed by the mayor and confirmed by the council. In towns they shall be elected in the same manner as other town officers.” (41:45)
“The said board of commissioners shall, so far as consistent with the terms of the trusts, manage and control the same, and distribute the income in accordance with the terms of the respective trusts. The board shall keep a record of its doings, and at the close of each financial year shall make a report to the town, showing the total amount of the funds, and their investments, receipts and disbursements on account of the same, setting forth in detail the sources of the receipts and the purposes of the expenditures.” (41:47)
When a town has more than 5,000 residents and has not created a board of commissioners of trust funds, authority over trust funds rests with the town meeting.
The Board of Selectmen as Trust Fund Commissioners
“If a town having less than five thousand inhabitants votes to accept this section, the board of selectmen of such town shall thereafter have all the powers and duties of commissioners of trust funds, as provided in sections forty-five and forty-seven, until such time as the number of inhabitants of said town shall exceed five thousand.” (41:45A)
“The town treasurer shall be the custodian of all funds and securities of such trust funds, shall invest and reinvest them and expend therefrom monies as directed by the commissioners. The treasurer shall furnish a bond satisfactory to them for the faithful performance of his duties.” (41:46)
The treasurer's bond “shall cover the duties of the treasurer with respect to trust funds…which are in his custody by virtue of his office, and any such funds, for the purposes of said bond, shall be deemed to be public funds.” (41:35)
The Treasurer and the Trust Fund Commissioners
Although the treasurer is the “custodian” of trust funds (41:46), the treasurer must “invest and reinvest them as directed by the [trust fund] commissioners.” (Emphasis supplied.) Notwithstanding, Ch. 44 §54 sets out rules and provisions controlling the investment of trust funds. The treasurer should advise the commissioners about the requirements of this statute and should timely notify them of any investment instruction which would contravene it. The treasurer should always be willing to share his or her financial expertise with the trust fund commissioners.
Cemetery Commissioners and Perpetual Care Funds
A town with cemetery commissioners may receive gifts for maintenance of cemeteries and cemetery lots. These gifts must be turned over to the treasurer and maintained in a “perpetual care fund,” separate from other accounts of the town. The treasurer must invest perpetual care monies in accordance with the specific instructions of the donors. If the donors gave no investment instructions, the treasurer must invest the monies as directed by the cemetery commissioners. (114:25)
Library Trustees and Gifts to Libraries
A town that appropriates money for the support of a free public library must elect a board of library trustees. (78:10) The library trustees may accept gifts of money and property for the library's use. Such monies must be turned over to the treasurer for deposit in a separate account. These monies must be administered by the library trustees “in accordance with the provisions of [the] gift….” (78:11)
Municipal Trust Funds when the Principal is not in the Custody of the Community
If a gift of money is made, not to a municipality, but to some person or entity in trust for the benefit of the municipality, the municipality may accept the gift, pursuant to its terms, and use the proceeds for the intended purpose(s).
Investment of Trust Funds in the Custody of the Treasurer
Unless otherwise provided or directed by the donor, trust funds must (a) be placed at interest in savings banks or trust companies, (b) invested in a combined investment fund, such as the Massachusetts Municipal Depository Trust (29:38A), or (c) invested in bonds or notes which are legal investments for savings banks. (44:54) Cities or towns with a fund aggregate in excess of $250,000 may also invest such funds in securities which are legal for the investment of funds of savings banks, provided that (a) not more than 15% of such trust monies shall be invested in bank or insurance company stocks and (b) not more than 1½% of such monies shall be invested in the stock of any one bank or insurance company.
The Massachusetts Legal List, maintained by the Commissioner of Banks, sets out a list of legal investments for savings banks. (See excerpts from the Massachusetts List of Legal Investments, pages 6-13 through 6-19.)
Many of the banks in Massachusetts provide trust fund investment services. Investment options available range from simple money market accounts to active investment management of stock and bond portfolios consisting of Legal List investments. (See sample investment schedule, pages 6-20 through 6-23.)
Trust fund earnings may only be expended in strict compliance with the terms of the respective trusts. Accordingly, the costs for banking services associated with the investment of any particular trust fund may only be paid from that fund if specifically authorized by the relevant trust instrument.
Trust fund commissioners should meet with the local treasurer to draw up a general policy statement that clearly establishes policies and principles for the management, control, and custody of trust funds. Following are example elements of a sound policy statement:
Ch. 44 §53 prescribes that, unless otherwise provided by some general law or special act, all monies received by the treasurer must be deposited in the general fund and not subsequently expended without further appropriation. Gift and trust funds, as well as cemetery and library funds, discussed above, may be deposited in separate accounts and expended without appropriation since specific, general laws, so provide. (See citations above.) The following list enumerates and discusses some of the additional, special, permanent funds expressly permitted by Massachusetts law. The treasurer is the custodian of these funds, which must be accounted for separately by the accounting officer. The treasurer may invest these special funds in combination with trust funds, so long as the governing statute expressly permits.
For the purpose of stabilizing its tax rate, a municipality, by the majority vote of its appropriating authority, may vote monies into a stabilization fund. Any year's appropriation may not exceed 10% of the previous year’s levy, unless the Emergency Finance Board approves a larger amount. The aggregate amount in the fund at any time may not exceed 10% of the equalized valuation of the city or town. All interest earned on fund monies becomes part of the fund. The treasurer, as custodian, may invest fund monies in “savings banks, co-operative banks or trust companies organized under [Massachusetts law], or invest the [monies] in such securities as are legal for the investment of funds of savings banks under the laws of the commonwealth or in federal savings and loan associations situated in the commonwealth.” Ch. 40 §5B, which authorizes stabilization funds, does not expressly allow fund monies to be deposited into the Massachusetts Municipal Depository Trust; however, the legislation establishing the MMDT (29:38A) was drafted sufficiently broadly to permit investment of stabilization funds into the trust.
In order to offset the anticipated future cost of funding the contributory retirement systems, municipalities may appropriate monies into a pension reserve fund. Any year's appropriation may not exceed 5% of the previous year’s levy, and the aggregate amount in the fund at any time may not exceed 5% of the equalized valuation of the city or town. All interest earned on fund monies becomes part of the fund. The treasurer, as custodian, may invest fund monies “in national banks or invest the proceeds by deposit in savings banks, cooperative banks or trust companies organized under the laws of the commonwealth, or invest the same in such securities as are legal for the investment of funds of savings banks under the laws of the commonwealth or in federal savings and loan associations situated in the commonwealth or may participate in the PRIT Fund in accordance with Ch. 32 §22(8).” (40:5D)
Unemployment Compensation Fund
To provide for the anticipated costs of funding reimbursements to the Commonwealth for unemployment compensation benefits under the provisions of Chapter 151A, municipalities may appropriate monies into an unemployment compensation reserve fund. Any year's appropriation may not one tenth of 1% of the equalized valuation of the city or town, and the aggregate amount in the fund at any time may not exceed 1% of that equalized valuation. All interest earned on fund monies becomes part of the fund. The treasurer, as custodian, “may deposit or invest fund monies in such manner as may be legal for other city, town or district funds under the laws of the commonwealth including, without limitation, the Massachusetts Municipal Depository Trust.” (40:5E)
Scholarship Fund or Education Fund
Municipalities, through acceptance of Ch. 60 §3C, may establish a scholarship fund to provide educational financial aid to deserving city and town residents and to establish a local educational fund to provide supplemental educational funding for local educational needs or to provide funding for existing adult literacy programs. Communities establishing such funds may designate a place on their property tax bills and/or motor vehicle excise bills, or upon a separate form enclosed with those bills, whereby the taxpayers can voluntarily check off, donate and pledge an amount to be deposited into the scholarship fund and/or education fund. Donations increase the overall amount due. The treasurer, as custodian, must invest such funds at the direction of the board of commissioners of trust funds or other trust fund authority. All interest earned on fund monies becomes part of the fund. The scholarship committee or education fund committee, established under the act, shall select the recipients of and amounts of financial aid from the scholarship fund and educational fund. The scholarship committee may distribute monies from both the interest and principal of the fund, without further appropriation, and must notify the treasurer, at least annually, of the amount that will be authorized for distribution in order that the monies may be made available in a timely manner. (60:3C)
Elderly and Disabled Taxation Fund
Municipalities, through acceptance of Ch. 60 §3D, may establish an elderly and disabled taxation fund to defray the real estate taxes of elderly and disabled persons of low income. Communities establishing such funds may designate a place on their property tax bills and/or motor vehicle excise bills, or upon a separate form enclosed with those bills, whereby the taxpayers can voluntarily check off, donate and pledge an amount to be deposited into the elderly and disabled taxation fund. Donations increase the overall amount due. The treasurer, as custodian, must invest such funds at the direction of the board of commissioners of trust funds or other trust fund authority. All interest earned on fund monies becomes part of the fund. The taxation aid committee, established under the act, must adopt rules and regulations to carry out the provisions of the act and to identify the recipients of aid from the fund. The fund, together with accrued interest, may be expended without further appropriation.
Proceeds from the sale of property seized from illegal drug-related activities may be deposited to a Law Enforcement Trust Fund and expended to defray certain qualified law enforcement costs as outlined in Ch. 94C §47. The police chief may authorize expenditures without further appropriation.
Other Special Permanent Funds:
| • Ambulance receipts reserved fund | (40:5F) |
| • Beach & pool receipts reserved fund | (40:5F) |
| • Bond proceeds fund | (44:20) |
| • Certain insurance proceeds fund (up to $20,000) | (44:53) |
| • Conservation fund | (40:8C) |
| • County dog fund | (140:147A,172) |
| • Golf course receipts reserved fund | (40:5F) |
| • Health claims trust fund | (32B:3A) |
| • Highway & water pollution grants fund | (44:53) |
| • Law enforcement trust fund | (94c:47) |
| • Lost books/industrial arts supplies fund | (44:53) |
| • Municipal buildings trust fund | (40:13) |
| • Off-street parking receipts fund | (40:22B,22C) |
| • Parking meter fees fund | (40:22A) |
| • Recycling commission fund | (40:8H) |
| • Sale of real estate fund | (44:63) |
| • Skating rink receipts reserved fund | (40:5F) |
| • Waterways improvement fund | (40:5G & (60B:2(i)) |
| • Weights & measures violations civil citations fund | (98:29A) |
| • Wetlands protection fund | (131:40) |
| • Workmen's compensation insurance fund | (40:13A) |
Treasurers should carefully examine the terms of each gift given in trust to the municipality. They should also thoughtfully study all legislative acts whereby the municipality establishes a trust fund or funds. Such preparation will assist treasurers to make only proper expenditures from trust funds.
In addition, treasurers should diligently maintain reliable records of all monies received as trust property. When acquiring trust funds, the treasurer should record them as a receipt in the cash book. To provide an adequate audit trail of trust fund disbursements, the treasurer should processed them by warrant. Upon purchasing securities with trust funds, the treasurer should record the transaction as a payment, entering the purchase by number, name, type, rate, maturity and par value. When depositing trust monies into a savings account, the treasurer should record the account number with the payment notation. Treasurers' trust fund records should include a subsidiary ledger that documents all income and expense information about each trust fund, separately. The records should clearly identify expendable and non-expendable monies within each trust fund. The treasurer should timely report all interest earned on trust funds to the accounting officer upon receiving notice of the amount of that interest. If the account has a permanent dividend order, the treasurer should record the amount of the accrued interest when notified by the bank. Finally, the treasurer should regularly reconcile all trust fund records with the accounting officer.
The federal and state governments give monetary assistance to cities and towns through numerous grant programs. Two particularly well known examples include Community Development Block Grants and Chapter 90 Highway Grants. The Commonwealth distributes monies to cities and towns for transportation purposes through the Chapter 90 grant program, funded by the Legislature with the enactment of transportation bond bills. The federal government distributes Community Development Block Grants to promote the development of viable urban communities within the commonwealth, pursuant to sections 300, et seq., of the Omnibus Budget Reconciliation Act of 1981.
Upon a municipality's receiving a grant, its finance officials should obtain a copy of the grant document and familiarize themselves with its accounting and financial reporting requirements. Subsequently, they must set up whatever bank accounts and subsidiary records that are mandated by grant agreement.
In administering a grant, the finance officers must maintain the necessary accounting and fiscal records to properly record the receipt, expenditure, and current balances of the funds received from the grantor. Upon the culmination of the grant program or activity, they should maintain records showing the ultimate disposition of all grant monies.
Treasurers, in their role as custodians of all funds, including grants, should pay particular attention to depository and investment requirements. Grant agreements generally include a requirement to maintain a separate accounting for the grant program. In order for the treasurer to pool grant monies for investment purposes, the accounting officer must maintain a separate accounting of those monies. If so required by a grant agreement, the treasurer must segregate grant monies, depositing them into separate checking accounts.
Interest earned on grant funds stays with and becomes part of the grant only if expressly specified in the grant agreement. Otherwise, these monies must be deposited into the municipality's general fund.
Overall, grantees must be vigilant in complying with all grant provisions and in documenting their compliance. Otherwise, upon a final audit, the municipality might be required to rebate misapplied or unsubstantiated amounts.
The General Laws also permit cities and towns to establish revolving accounts, whereby revenues from a specific service are deposited into the account and subsequently expended, without appropriation, to support the particular service.
The Departmental Receipts Revolving Fund, authorized by Ch. 44 §53E½, constitutes a sort of hybrid revolving fund, because the appropriating authority retains some control over spending purposes and levels. The legislation stipulates that each departmental revolving fund must be re-authorized each year at annual town meeting or by city council action and that a limit on the total amount that may be spent from each fund must be established at that time. The aggregate of all revolving funds may not exceed 10% of the amount raised by taxation by the city or town in the most recent fiscal year, and no more than 1% of the amount raised by taxation may be administered by a single fund. Wages or salaries for full-time employees may be paid from the revolving fund only if the fund is also charged for all associated fringe benefits.
Massachusetts law permits a variety of other, particular revolving funds for specific, municipal programs. The more general departmental revolving fund may be implemented in addition to or in conjunction with these other statutory revolving funds, provided that the departmental revolving fund does not conflict with provisions of the other revolving funds. Examples of existing, statutory revolving funds include:
| • Adult/continuing ed./school property revolving fund | (71:71E) |
| • Arts lottery council money revolving fund | (10:58) |
| • Community school programs revolving fund | (71:71C) |
| • Culinary arts program revolving fund | (71:17A) |
| • METCO reimbursement revolving fund | (71B:12,12A) |
| • Non-resident students' tuition revolving fund | (71:71F) |
| • Off duty or special work detail revolving fund | (44:53C) |
| • Overlay account revolving fund | (59:25,70A) |
| • Parks and recreation revolving fund | (44:53D) |
| • Performance bond forfeitures revolving fund | (41:81U) |
| • Police special details revolving fund | (44:53C) |
| • Reimbursement conservation land debt revolving fund | (132A:11) |
| • School athletic fund revolving fund | (71:47) |
| • School day-care receipts revolving fund | (71:26C) |
| • School E&D revolving fund | (70:11) |
| • School lunch fund revolving fund | (548 of Acts of 1948) [3] |
| • School rental receipts revolving fund | (40:3) |
| • Tuition for state wards revolving fund | (76:12B) |
| • Vocational ed. program receipts revolving fund | (74:14bB) |
| • Zoning/planning board consultants revolving fund | (44:53G) |
[1] For the purposes of Ch. 40, Section 1 of that chapter states, “Except as otherwise expressly provided, cities shall have all the powers of towns and such additional powers as are granted to them by their charters or by general or special law, and all laws relative to towns shall apply to cities.”
[2] Ibid.
[3] As amended
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