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As far as I can tell, my function properly resembles the samples I've seen. Can someone clue me in as to how I get this to work?

create or replace function get_user_by_username(
    username varchar(250),
    online boolean
    ) returns setof record as $$
declare result record;
begin

    if online then 
        update users
        set last_activity = current_timestamp
        where user_name = username;
    end if;

    return query
    select
        user_id,
        user_name,
        last_activity,
        created,
        email,
        approved,
        last_lockout,
        last_login,
        last_password_changed,
        password_question,
        comment
    from
        users
    where
        user_name = username
    limit 1;

    return;
end;
$$ language plpgsql;

Answers

if you would like to create function returning setof record, you'll need to define column types in your select statement

More info

Your query should look something like this:

select * from get_user_by_username('Username', True) as 
  f(user_id integer, user_name varchar, last_activity, varchar, created date, email        archar, approved boolean, last_lockout timestamp, last_login timestamp, 
  last_password_changed timestamp, password_question varchar, comment varchar)

(you will probably need to change the data types)

I personaly prefer the types approach. it assures that if the function is edited, all the queries will return correct results. It might be a pain because every time you modify function's arguments you'll need to recreate/drop types aswell tho.

Eg:

CREATE TYPE return_type as 
(user_id integer,
 user_name varchar,
 last_activity varchar,
 created timestamp,
 email varchar,
 approved boolean,
 last_lockout timestamp ,
 last_login timestamp,
 last_password_changed timestamp,
 password_question varchar,
 comment varchar);

create or replace function get_user_by_username( username varchar(250), online 

boolean) returns setof return_type as $$
declare _rec return_type;
begin
    if online then 
        update users
        set last_activity = current_timestamp
        where user_name = username;
    end if;
    for _rec in select
        user_id,
        user_name,
        last_activity,
        created,
        email,
        approved,
        last_lockout,
        last_login,
        last_password_changed,
        password_question,
        comment
      from
        users
      where
        user_name = username
      limit 1 
    loop

      return next _rec;

    end loop

end;
$$ language plpgsql;