Module 6: Capital Project Fund & Debt Service Fund

Question 1

Arbitrage

Answer 1

The concurrent purchase and sale of the same or an equivalent security to profit from difference in interest rates. Generally, as it relates to governments, the issuance of debt at relatively low, tax-exempt, rates of interest and the investment of the proceeds into taxable securities yielding a higher rate of return.

Question 2

Bond Refunding

Answer 2

The issuance of new bonds to replace bonds already outstanding, usually with the intent of reducing debt service costs.

Question 3

Bonds

Answer 3

A written promise to pay a specified sum of money (its face value) at one or more specified times in the future along with periodic interest. Bonds are a form of notes payable but are characterized by longer periods of maturity and more formal documentation.

Question 4

Call Prices

Answer 4

A predetermined price at which the issuer of bonds may redeem (call) the bonds irrespective of the current market price

Question 5

Capital Projects Funds

Answer 5

A governmental fund used to account for financial resources legally restricted and constractually set aside for the acquisition or construction of major capital facilities

Question 6

Coupon Rate

Answer 6

The stated interest rate on the face of a bond; a bond’s nominal interest rate

Question 7

Debt Service Fund

Answer 7

A governmental fund to account for financial resources that are restricted, committed or assigned to the payment of interest and principal on long-term debt; a sinking fund

Question 8

Economic Cost

Answer 8

The full cost of goods or services, as opposed to that which might be recognized for financial accounting. For example, the full amount of compensation to be paid by a government, including that of pensions and compensated absences, rather than merely the amount paid to the employees during the current period

Question 9

In-substance Defeasance

Answer 9

An advance refunding (retirement of bonds) in which the government places sufficient resources in a trust account to cover all required principal and interest payments on the defeased debt.

Question 10

Issue Costs

Answer 10

costs incurred to issue bonds, such as amounts paid to underwriters, attorney, accountants and printers

Question 11

Modified Accrual Basis

Answer 11

the accrual basis of accounting adapted to the government fund-type measurement focus. Revenues are recognized in the period in which they become available and measured. Some expenditures are recognized on a accrual basis; others on a cash basis

Question 12

Refiance

Answer 12

To replace existing debt with new debt, generally to take advantage of lower interest rates, or to shorten or lengthen the debt payout period.

Question 13

Are budgetary entries required for the capital projects fund?

Answer 13

No, only for the general and special revenue funds.

Question 14

What is the accounting procedure when a government fund (like the GF) acquires a long-term asset?

Answer 14

Records the cost as an expenditure in the year of acquisition

Question 15

What is the accounting procedure when bonds are sold and the funds are used by governmental fund?

Answer 15

The funds are recorded as Other Financing Sources - Proceeds of Bonds

Question 16

What is the primary purpose of the capital project fund?

Answer 16

Ensure and demonstrate the expenditure of the dedicated financial resource is both legally and contractually compliant

Question 17

What are the two types of capital project funds?

Answer 17

General (for public benefit) or Special Assessment (private benefit)

Question 18

Where are capital assets maintained in the fund statements?

Answer 18

Schedule of Capital Assets

Question 19

What are the three phases of the construction cycle?

Answer 19

Preconstruction Phase, Construction Phase, Debt Servicing Phase

Question 20

What are the three types of long-term financing for Capital Projects?

Answer 20

Type I - Tax Supported Debt (Gen Ob Bonds or special taxes restricted to payment of debt); Type II - Grants; Type III - Other forms of financing (special assessments)

Question 21

What are special assessments?

Answer 21

Taxes levied when TP in areas beyond their jurisdiction want to benefit from certain facilities and services or the improvements will increase the value of taxpayer owned property.

Question 22

What are benefits of budgeting within the capital project fund?

Answer 22

Numerous projects are integrated into a single fund, so budgetary accounts help control individual project expenditures

Question 23

When does GASB require budgeting over integrated capital projects funds?

Answer 23

When control cannot be established by other means (e.g. fixed-price contracts)

Question 24

Does Debt Service Fund include debt issued and serviced by Enterprise or Internal Funds (and some Trust funds)?

Answer 24

No

Question 25

Are interest and/or principal considered current liabilities of DSF?

Answer 25

Not until the period in which they must be paid

Question 26

What are the types of resources that the DSF can receive?

Answer 26

1 - Tax Supported Debt (Taxes Levied by DSF, Taxes levied by GF and transf to DSF, or special taxes restricted to the payment of debt)
2 - Other means of financing - special assessment

Question 27

When does GASB required DSF be established?

Answer 27

When legally required or financial resources are being accumulated for principal and interest maturing in future years

Question 28

What does GASB recommend for DSF’s?

Answer 28

A single DSF for all debt serviced by property taxes; Governments to hold number of funds to a minimum

Question 29

Are budgets common for DSF?

Answer 29

No, however, if resources are derived from special taxes or assessments, then an appropriation budget enhances control - Determination of the use of budgetary accounts is usually decided legislatively

Question 30

What are the two types of tax supported debt?

Answer 30

1 - Serial Bonds; 2 - Term Bonds

Question 31

How are serial bonds budgeted for in the DSF?

Answer 31

For serial bonds, the amounts budgeted for revenue or inter-fund transfers in, is usually just what is needed that fiscal year for matured principal and interest; Advantage - self amortizing and no sinking fund needed; principal matures in annual installments

Question 32

When is a government obligated to account for special assessment debt?

Answer 32

If it is responsible for the debt in the event of property owner or default; or it is legally liable for assuming the debt or gives indication that it may honor the debt in the event of default

Question 33

How is the special assessment accounted for when the government is not obligated?

Answer 33

Both the special assessment debt and the debt service are accounted for in an agency fund

Question 34

What are the two provisions to prevent arbitrage abuse?

Answer 34

1 - Arbitrage restrictions - complex and contain several exemptions and exceptions
2 - Rebate on arbitrage (any revenues from arbitrage should be given to the government)

Question 35

What situation leads to “in-substance defeasance”?

Answer 35

Bonds without a call feature that are not actively traded

Question 36

What conditions should in-substance defeasance satisfy?

Answer 36

• Debtor must place cash/assets with an escrow agent to be soley used for servicing/retiring the debt
• Possibility of debtor having to make future payments on the debt must be remote
• Assets in escrow fund must be investments considered “risk-free” like US Treasury Bonds
• Amortize loss (or gain) over future years using the shorter of the original term or the term of the new debt.