1. © Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders7 - 1 CHAPTER 7 CAPITAL PROJECTS FUNDS

2. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 2 LEARNING OBJECTIVES Understand the nature, purposes and use of Capital Projects Funds and the –Funding sources –Number of funds required –Life cycle Determine the costs that should be charged to a Capital Projects Fund

3. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 3 LEARNING OBJECTIVES Understand the accounting and reporting for –General long-term debt issuances to finance capital projects –Bond proceeds, premiums and discounts –Bond issuance costs –Bond anticipation notes –Arbitrage and its potential impact Understand typical budgeting and budgetary reporting issues of Capital Projects Funds

4. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 4 MAJOR TOPICS 1.Overview 2.CPF operations and accounting standards 3.CPF case illustration - begun (20X1) and concluded (20X2) 4.Other CPF operations, accounting, and reporting matters

5. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 5 CAPITAL PROJECTS FUNDS OVERVIEW Use of CPFs –To account for financial resources used to construct or acquire Major general government capital projects –Buildings / parks –Streets / highways / bridges (Infrastructure) Nonmajor capital acquisitions if legally or contractually required

6. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 6 CAPITAL PROJECTS FUNDS OVERVIEW Use of CPFs – Interpretation of terms relative to size –Major and capital projects not defined by GASB –Example: consider a $10 million street improvement project may be: Capital Project Funds in a small city or town Special Revenue Fund (especially if part grant funded) or General Fund in a state (if routine maintenance) assuming no legal or contractual requirements to record in a Capital Projects Fund

7. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 7 CAPITAL PROJECTS FUNDS OVERVIEW Use of other funds –General or Special Revenue Funds Commonly used for capital asset acquisitions –Vehicles –Equipment –Capital leases unless legally or contractually prohibited –Proprietary or Trust Funds Used for capital acquisitions of those funds

8. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 8 CAPITAL PROJECTS FUNDS OVERVIEW Purpose is to –Ensure economical and legal expenditure of restricted capital resources such as –Serve as a cost accounting tool –Control and account for project costs A choice of many finance officers Systems designed to transfer or accumulate multiple resources in a multi-year capital fund versus an annual operating fund

9. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 9 CAPITAL PROJECTS FUNDS OVERVIEW Major capital projects –Often financed with Long-term bond issue proceeds Intergovernmental capital grants –Related agreements plus GAAP often require use of CPFs to account for project

10. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 10 CAPITAL PROJECTS FUNDS OVERVIEW Apply the same basic accounting and financial reporting standards as: –General funds –Special revenue funds

11. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 11 CAPITAL PROJECTS AND DEBT PROCEEDS Not required for all capital projects or capital asset purchases GASB recommends recording in - –CPF for general government capital projects –Debt Service Fund for debt refunding –Proprietary & Trust Funds if debt serviced by those funds

12. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 12 OTHER DEBT PROCEEDS GASB standards do not address debt issued for other purposes, but recording is appropriate as follows for debt issued to: –Finance a deficit – the fund having the deficit –Provide disaster relief, depending on the type of relief or expenditure has fund options as follows: Capital Projects – to rebuild capital assets Special Revenue - to provide individual or city relief, especially if partially grant reimbursed General – to provide interim cash flow financing

13. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 13 CAPITAL PROJECTS FUNDS SPECIAL ASSESSMENTS Some capital projects financed with special assessments (a special tax) imposed only against benefited properties Project examples: –Street improvements –Sidewalks –Neighborhood beautification –Street improvements

14. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 14 CAPITAL PROJECTS FUNDS SPECIAL ASSESSMENTS Long-term debt often issued since assessments are repaid over 5-10 years Debt proceeds recorded in CPF Assessment collections to service the related debt service transactions are recorded in a Debt Service Fund (Chapter 8)

15. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 15 CAPITAL PROJECTS FUNDS SPECIAL ASSESSMENTS Accounted for like other major general government capital projects in a Capital Projects Fund and - –Bonds payable in the General Long-Term Debt Accounts –Capital assets in the General Capital Asset accounts in all cases, except business-type activities, even if no obligation debt finances project

16. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 16 CAPITAL PROJECTS FUNDS SPECIAL ASSESSMENTS Role of the government –Provides construction financing (CPF) (own funds or borrowed funds) –Levies property assessments (DSF) (a special property tax) –Bills / collects assessments (DSF) (receivable and interest) –Services the debt (DSF) (principal and interest)

17. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 17 CAPITAL PROJECTS FUNDS SPECIAL ASSESSMENTS Almost always used to record - –Financial resources –Capital expenditures Financial resources (“geography”) –OFS - Bond proceeds (government obligation debt) –OFS - Owner contributions (no obligation debt) –OFS - Transfers from other funds (own funds) –Revenues - Assessments - “Pay-go” (rare)

18. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 18 CAPITAL PROJECTS FUNDS DISCUSSION TOPICS Sources of financing Required number of funds Life cycle of capital projects CPF budget Interim financing Costs charged to projects Intergovernmental revenues Bond premium/discount & issuance costs

19. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 19 FINANCING SOURCES Revenues (When earned and available): –Intergovernmental grants –Investment income (from unspent proceeds) Other financing sources: –General obligation debt proceeds –Special assessment debt proceeds –Interfund transfers

20. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 20 NUMBER OF FUNDS Common to have a separate CPF for each - –Project and debt issue –Combining statements present financial operations and financial position of each Purpose of separation: –Nature of projects vary widely –Budgeted and financed separately –Legal and contractual requirements vary widely –Demonstrate use only for authorized purposes –Fund balance legal / contractual compliance

21. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 21 NUMBER OF FUNDS However, a single CPF may be used for similar projects if financed with: –Single debt issue –Single grant –Internal transfers A single CPF may also be used with different financing restrictions and projects by using – –“Sub-funds” or “funds within a fund” –Still requires proper controls and compliance

22. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 22 LIFE CYCLE (Figure 7-1) Authorized by legislative action –Life is commonly two or more years –Fund established by Project or Bond issue

23. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 23 LIFE CYCLE (Figure 7-1) Receipt of financial resources –Long-term debt proceeds Simultaneous recording of liability in General Long-Term Liability accounts –Short-term debt proceeds Repaid as resources become available –Interfund transfers (GF / SRF) –Interest on unspent resources –Intergovernmental (state/federal) grants

24. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 24 LIFE CYCLE (Figure 7-1) Capital expenditures incurred; usually over two or more fiscal years –Contracts encumbered –Services delivered –Payments made Construction in progress / completed capital assets –Simultaneous recording in General Capital Assets accounts

25. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 25 LIFE CYCLE (Figure 7-1) Fund terminated when –Project completed –All costs paid –Disposition of any unspent grant balances or bond proceeds determined by Grant agreements / contracts (i.e., pro rata rebate) Bond indentures (i.e., transferred for debt service)

26. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 26 CAPITAL BUDGET Planned in long-term capital improvement plan CIP Annual capital budget appropriated on a project basis Appropriations do not lapse annually

27. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 27 CAPITAL BUDGET Controls without budgetary process Appropriations not made Reasons: –Single project financed from a single fund –Controls provided by contractual process

28. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 28 CAPITAL BUDGET Budget control is important when - –Multiple projects in a single fund –Budgeted in detail –Government labor forces –Budgeted annually

29. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 29 INTERIM FINANCING Nature and purpose –Usually in early stages of the project –Prior to debt issuance or grant receipts that are timed with bulk of expenditures –Other reasons: Improved bond market conditions Avoid project delays awaiting bond issuance –Repaid when bond proceeds or other resources are received

30. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 30 INTERIM FINANCING Most types are current liability of the CPF –BANs, interfund borrowing, RANs, notes –The loan is not “Other financing resources” –Principal repayment is not an expenditure –Interest is accrued as an expenditure

31. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 31 INTERIM FINANCING Criteria for treatment of BANs as long- term debt: 1.BANs were issued pursuant to a legally authorized bond issue and definitely issuable 2.Two specific GASB refinancing criteria met: 1. Legal steps taken to refinance the BANs 2. Intent to refinance supported by ability to do so –If criteria not met, BANs must be reported as a CPF liability

32. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 32 INTERIM FINANCING BANs that qualify for long-term debt treatment –BAN proceeds reported as “Other financing resources” of CPF –BAN liability is recorded in the GLTL accounts; not the CPF –Interest is recorded as an expenditure only when due

33. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 33 COSTS CHARGED TO PROJECTS All costs to bring to state of readiness are appropriate expenditures of CPF –Direct costs Land, buildings, materials, labor A&E fees, transportation, damages –Overhead / indirect costs Rarely charged unless reimbursable –Interest on interim short-term CPF debt

34. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 34 INTERGOVERNMENTAL REVENUES As “revenues” they are subject to modified accrual basis for recognition –Must be measurable and available –Determined by legal and contractual requirements Capital grants - most are expenditure driven –Revenue recognized as expenditures are incurred –Defer revenue if received prior –Footnote disclosure if awarded and no receipt or expenditure

35. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 35 BOND PREMIUM, DISCOUNT & ISSUANCE COSTS Bond proceeds recorded in CPF –Recorded at par value –Any bond premium or discount recorded separately –Bond issuance costs recorded as expenditure Above may impact available funds and project authorization levels

36. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 36 CASE ILLUSTRATION Case begun - 20X1 –Establish budgetary entry (B) –Review transactions and events - Entries (1) – (8) & Figure 7-9

37. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 37 LIFE CYCLE VERSUS FISCAL YEAR (Figure 7-3) Appropriations made for project life Compliance and project cost reported upon completion Fiscal year statements for CPFs are interim financial statements Relevant statements are from inception to completion

38. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 38 FINANCIAL STATEMENTS Two annual statements required –Balance Sheet (Figure 7-4) –Statement of Revenues, Expenditures, and Changes in Fund Balances (Figure 7-5) Budgetary statement or schedule may be legally or contractually required (Figure 7-7)

39. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 39 CASE ILLUSTRATION Case concluded - 20X2 –Review transactions and events - Entries (1) – (6) –See budgetary comparison statement – Figure 7-7

40. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 40 OTHER MATTERS Investment of idle cash / Arbitrage –Federal regulations require governments rebate excess interest to the Federal government Interest earned on taxable investments in excess of Interest paid on tax-exempt debt issued –Investment revenues reduced and liability established for arbitrage liabilities, if any

41. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 41 OTHER MATTERS Disposing of fund balance or deficit –In absence of legal or contractual restrictions Often determined by governing body Usually transferred to Debt Service Fund –Makeup of any deficit may come from the General Fund or through added bond proceeds

42. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 42 OTHER MATTERS Reporting several projects financed through one fund –Several projects may be accounted for on a “funds within a fund” approach –Financial statements presented in a series of separate fund statements or “combining statements” (Figure 7-8)