Accounting office explains internal service funds; ADS seeks transfer to ease SLA arrears and billing shift

A Department of Finance and Management (DFM) presenter gave the Senate Appropriations Committee an overview of internal service funds (ISFs) and the rationale behind a proposed change in ADS's billing methods, telling senators on March 28 that the change is intended to reduce year-to-year volatility in agency IT charges.

The presentation distinguished allocation-based ISFs (usually headcount or transaction-driven allocations that spread shared costs across agencies) from demand-based ISFs (billing departments that actually use a service, such as fleet or copy center billing). The presenter described the "vision" fund (finance/HR system) as a hybrid that charges HR-related costs by headcount and accounting-system costs by transaction volume.

Why it matters: ADS currently bills a set of services on a service-level agreement (SLA) or demand basis. DFM staff said the FY26 SLA pot is approximately $30 million in services that could be billed after the fact (building arrears). ADS's proposal, supported by DFM, would move roughly $15 million of that $30 million into an allocation line (headcount-based charges) to reduce variability and simplify billing.

To avoid double-billing departments during the transition year (FY27), ADS requested a one-time general fund transfer of $15 million in FY26 so ADS can pay the arrears now and begin charging agencies through allocations in FY27. Committee staff and presenters said the House reduced that transfer request to $10 million; if the transfer is smaller than requested, DFM said the ADS ISF would carry a larger FY26 deficit and the agency would need to address the shortfall in subsequent budget adjustments or BAA.

Jason Bernard of the Agency of Administration identified Harmony Wilder as the financial director who builds the insurance and allocation rates and confirmed ongoing rate work in the Agency of Administration's financial services division. DFM staff said an internal team handles allocations: one analyst in DFM is dedicated to internal service fund allocations and DFM has a budget and management division with five analysts and a director who coordinate communication to departments.

Presenters described the main drivers behind about half of the $15 million targeted for allocation: cloud data storage and enterprise licensing (for example, Microsoft 365 licenses), which have migrated from on-premises capital spending to recurring cloud and license expenses. Moving those costs to an allocation is intended to provide more predictable departmental charges.

Presenters also explained the practical accounting problem: SLA billing is arrears-based (bills are for prior-year services). If ADS moves services to allocation in FY27 without a FY26 transfer, agencies would face both a prior-year SLA bill and a new allocation bill for the same service in FY27, producing double-billing. The requested FY26 transfer prevents that double-charge.

DFM said the proposed transfer and billing model change were developed collaboratively with ADS; DFM does not expect ADS to complete a full shift to the allocation model until FY27. Presenters stressed the ISF processes are intended to be compliant with government accounting standards and federal audit scrutiny.

No formal vote was taken during the hearing. Committee members asked how a smaller transfer (for example, the House's $10 million) would affect the FY26 budget; presenters said a smaller transfer would increase the FY26 deficit in the ADS fund and that DFM would attempt to resolve the gap in BAA or subsequent budgeting.

Ending: The topic is expected to return to budget-adjustment discussions (BAA) and the ADS/DFM transition plan will be part of ongoing FY26 deliberations.