Is the use of an internal service fund appropriate when a government does not intend to recover the full cost of goods and services?

The use of an internal service fund is typically appropriate when a government aims to charge users for the goods and services provided, ideally recovering the full costs associated with those services. Internal service funds are designed to provide services to other governmental departments or agencies on a cost-reimbursement basis. If a government does not intend to recover the full cost of the goods and services, it undermines the purpose of the fund, which is to operate like a business while providing services in an efficient and accountable manner.

In scenarios where costs are not fully recovered, this would likely lead to cross-subsidization or unrestricted funding, which can distort financial reporting and accountability. Furthermore, internal service funds are governed by principles that prioritize financial sustainability and accountability, which necessitates full cost recovery to maintain transparency and effective management. Thus, the intended design and purpose of internal service funds dictate that they should not be used if the full cost recovery is not a goal.