Capital Projects

Objectives:

• Why governments use capital project funds• Why governments use debt service funds• How to account for special assessments

Why Capital Project Funds

• Funds are legally restricted to be used on capital projects by:

Debt CovenantsLegislaturesCity Council

Capital Projects

•Short term accounting for the funds, then closed out. If included in general fund, might distort trends in the general fund.

• Also allows creditors to track the project• Allows special audits if necessary

Capital Projects• Modified Accrual basis• A fund is created for each project • Combine all capital project funds for CAFR• Budgetary entries not required but useful• Holds proceeds of debt issued to fund project• Also holds grants, transfers, taxes, etc. • Less underwriting costs• May use encumbrances• Cash sources bonds, debt, grants, or general

Issue DebtIssue Debt:Cash 101,000Expenditure 9,000

OFS-bond proceeds 100,000OFS Bond Premium 10,000

OR other funding

Cash 100,000OFS -Transfer in 100,000

Premiums & Discounts

• If bonds sold at a premium and the project is restricted to a maximum level, the premium is transferred to the debt service fund to pay interest or principal. ( due to/ due from)• If bonds sold at a discount, lower the expenditures on the project or make up difference from general fund. (OFS)• No amortization of premiums or discounts in governmental funds.

Premiums

Cash 101,000Expenditures (fees) 9,000

OFS - bond proceeds 100,000OFS - bond premium 10,000

OFU – Non-reciprocal transfer 1,000Cash 1,000

Debt Service Fund

Transfer in Debt Service: Cash 1,000

OFS- Transfer In 1,000

Must keep track of bonds payable in the Schedule of long term debt.

If debt service funds invested, the securities are marked to market, including accrued interest

Grants for Capital Projects

Restricted grant is expenditure driven:Cash 10,000

Deferred Revenue 10,000Expenditures 10,000

Cash 10,000Deferred Revenue 10,000

Revenue 10,000If expenditures made before grant received: Grant Receivable 5,000

Revenue 5,000

Spending on project

• Use expenditures• When asset finished keep track in schedule of long term assets•Can use percentage of completion if self constructed

End of Project

Transfer remaining funds out: Residual Equity transfer out $5,000

Cash $5,000

Can be transferred to debt service fund or general fund. Excess monies from grants would be returned to grantor.

Closing entries

• Close budgetary accounts. If these are for the project, they must be re-established. • Close revenue and expenditures if statement of revenue, expenditures, etc needed. • If reports only for cumulative revenue and expenditure, no need to close accounts.

Accounting for Debt Service

• Modified Accrual but interest on long term debt not accrued because it must be appropriated and this may not happen in advance. • If appropriated in one year for payment in the next, then interest is accrued and the liability is recognized. • May not be budgetary entries unless a special assessment fund.

Debt Service Fund

• Pays interest and principal of long term debt• The listing of the debt is schedule of long term debt.• Must be used when legally required and resources are accumulated for payment• May be one debt fund for each issue • Inflows include transfers from general fund, special taxes used to retire debt, or special assessments.

Entries, Debt Service

Budgetary entries: Estimated revenues - investments Estimated revenues - taxesEstimated transfers in Appropriations - interest

Appropriations - principal Fund Balance

Entries, con’t

Transfer in Bond Premium: Cash 1,000

OFS - operating transfer in 1,000 capital projects (general)

Invest money:Investment 1,000

Cash 1,000Recognizing earnings: Investment (cash) 100

Investment revenue 100

Entries, Con’t

Recognize Tax revenue: Cash 20,000Property Taxes receivable 5,000

Property tax revenue 25,000

Record transfers: Cash 15,000

OFS -operating transfer in 15,000

Entries, Con’t

Payment of interest and principal: Expenditures - debt service interest 6,000

Matured interest payable 6,000Matured interest payable 6,000

Cash 6,000Expenditures - debt service principal 10,000

Matured bonds payable 10,000Matured bonds payable 10,000

Cash 10,000

Earnings on funds held

If investments purchased: Marketable securities 50,000

Cash 50,000Adjusting entries: Marketable securities 750

Investment revenue 750

Securities are marked to market, interest accrued.

Closing Appropriations - interestAppropriations - principal

Estimated revenues - property tax Estimated revenues –investmentsEstimated transfers in

OFS - Operating transfers Property Tax revenue Investment revenue

Expenditure - interest Expenditures - principal Fund balance

Arbitrage

• When government bonds are tax free, the interest rates are lower than comparable investments, so governments could invest the proceeds of bond issue and earn extra interest.• IRS rulings generally make any incremental interest due to the IRS• Some safe havens• Paying the IRS either reduces revenues or is recognized as an expenditure.

Refinancings• Bonds may have call provisions• In substance defeasance substitutes a new bond issue for an existing one. • Criteria for in substance defeasance. • Places cash or assets with escrow to pay • Additional future payments remote• Risk-free assets

• Details in notes• Usually government defers the loss and recognizes it over future years.

Special Assessments

• A capital project which benefits only some taxpayers, like water and sewer.• Follows accounting for capital projects and debt service funds.• Assessments receivable are deferred revenue• Revenue when collected. • Need not be reported unless •Government issues debt•Government guarantees debt• Takes responsibility for the debt• Shares in the costs of the project

Special Assessment funds

• Debt is obligation of assessed parties but government is agent • Record debt and payment under current standards unless prohibited from assuming the debt and the government is not legally liable. • Governments can choose to account for special assessments as an enterprise fund

Government-wide statements

Assets reported on statement of net assets

If funds still held, then show as restricted to use for capital projects

Bond discounts and premiums will be amortized

Need to be set up on a depreciation schedule

Review

How governments use capital projects funds

Learn entries Capital projects funds Debt service funds Special assessments