Module 6: Capital Project Fund & Debt Service Fund Flashcards
Arbitrage
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.
Bond Refunding
The issuance of new bonds to replace bonds already outstanding, usually with the intent of reducing debt service costs.
Bonds
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.
Call Prices
A predetermined price at which the issuer of bonds may redeem (call) the bonds irrespective of the current market price
Capital Projects Funds
A governmental fund used to account for financial resources legally restricted and constractually set aside for the acquisition or construction of major capital facilities
Coupon Rate
The stated interest rate on the face of a bond; a bond’s nominal interest rate
Debt Service Fund
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
Economic Cost
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
In-substance Defeasance
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.
Issue Costs
costs incurred to issue bonds, such as amounts paid to underwriters, attorney, accountants and printers
Modified Accrual Basis
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
Refiance
To replace existing debt with new debt, generally to take advantage of lower interest rates, or to shorten or lengthen the debt payout period.
Are budgetary entries required for the capital projects fund?
No, only for the general and special revenue funds.
What is the accounting procedure when a government fund (like the GF) acquires a long-term asset?
Records the cost as an expenditure in the year of acquisition
What is the accounting procedure when bonds are sold and the funds are used by governmental fund?
The funds are recorded as Other Financing Sources - Proceeds of Bonds
What is the primary purpose of the capital project fund?
Ensure and demonstrate the expenditure of the dedicated financial resource is both legally and contractually compliant
What are the two types of capital project funds?
General (for public benefit) or Special Assessment (private benefit)
Where are capital assets maintained in the fund statements?
Schedule of Capital Assets
What are the three phases of the construction cycle?
Preconstruction Phase, Construction Phase, Debt Servicing Phase
What are the three types of long-term financing for Capital Projects?
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)
What are special assessments?
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.
What are benefits of budgeting within the capital project fund?
Numerous projects are integrated into a single fund, so budgetary accounts help control individual project expenditures
When does GASB require budgeting over integrated capital projects funds?
When control cannot be established by other means (e.g. fixed-price contracts)
Does Debt Service Fund include debt issued and serviced by Enterprise or Internal Funds (and some Trust funds)?
No
Are interest and/or principal considered current liabilities of DSF?
Not until the period in which they must be paid
What are the types of resources that the DSF can receive?
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
When does GASB required DSF be established?
When legally required or financial resources are being accumulated for principal and interest maturing in future years
What does GASB recommend for DSF’s?
A single DSF for all debt serviced by property taxes; Governments to hold number of funds to a minimum
Are budgets common for DSF?
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
What are the two types of tax supported debt?
1 - Serial Bonds; 2 - Term Bonds
How are serial bonds budgeted for in the DSF?
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
When is a government obligated to account for special assessment debt?
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
How is the special assessment accounted for when the government is not obligated?
Both the special assessment debt and the debt service are accounted for in an agency fund
What are the two provisions to prevent arbitrage abuse?
1 - Arbitrage restrictions - complex and contain several exemptions and exceptions
2 - Rebate on arbitrage (any revenues from arbitrage should be given to the government)
What situation leads to “in-substance defeasance”?
Bonds without a call feature that are not actively traded
What conditions should in-substance defeasance satisfy?
- 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.
