Capital Projects Funds

1. Capital Projects Funds Chapter 7

2. Learning Objectives • Understand nature of and when to use Capital Projects Funds (CPFs) • Understand typical CPF financing sources, how many CPFs are required, and life cycle of CPF • Determine costs to be charged to CPF • Understand accounting for long-term debt issued in CPF, including bond proceeds, premiums, discounts, bond issue costs, and bond anticipation notes • Understand basic budgeting and budgetary reporting for CPFs • Examine typical journal entries of CPF • Prepare CPF financial statements.

3. Why Use Capital Projects Funds? • CPFs used to account for financial resources that are used to construct / acquire major, long-lived general capital facilities • Examples • Buildings • Highways & bridges • Storm water drainage systems

4. Typical Capital Asset Acquisitions Not Using a CPF • Routine capital asset purchases – school buses and other equipment • Capital leases • Purchases of fund-specific capital assets to be used in Proprietary Funds or Trust Funds

5. CPF Life Cycle

6. Financing Capital Projects • General Long-term Debt • Account for the issuance in CPF • Debt Service Fund used to repay debt • Short-term borrowing (if necessary) • Interfund transfers • Interest and other revenues • Intergovernmental grants • Special assessments

7. Other Notes on Life Cycle • CPF may last for several fiscal years – whatever if the life of the project • Expenditures are typically all capital outlay • Upon termination, any necessary funds returned to providers of financing and remainder transferred to service debt (DSF) or to General Fund

8. Budgeting for a Capital Project • Usually prepared for the life of the project – appropriations do not lapse at end of fiscal year • Separate budget may not be required if one project financed by single CPF and project costs are controlled through specifications

9. Interim Financing • Authorized bond issue may take considerable time to issue • Interim financing used to fill the void – known as bond anticipation notes (BANs) • If properly used, may be long-term rather than short-term debt • BANs issued in conjunction with legally authorized bond issue • BANs are to be repaid (or have been repaid) from proceeds of bond issue

10. Interim Financing Comparison

11. Short-Term Borrowing Recorded as liability of fund Expenditure is for capital outlay Results in artificial deficit in Fund Balance BAN Financing Recorded as OFS Expenditure is for capital outlay OFS and expenditure cancel out – no artificial deficit Interim Financing Comparison(continued)

12. Project Costs • Overhead • General government overhead rarely charged unless reimbursable • Other overhead may be charged – costs from ISFs or incremental overhead from project • Interest • Short-term debt interest is project cost • Long-term debt interest not capitalized

13. Intergovernmental Revenues • Unrestricted grants usually recognized as revenues in General Fund or SRF – proceeds may be transferred to CPF • Restricted (capital) grants normally recognized as revenues in CPF, once it is earned (grantee incurred expenditures that are authorized for reimbursement)

14. CPF Case Illustration

15. Sign Contract

16. Issue Bonds at a Premium GASB requires that bonds be recorded at face value. Premiums (Other Financing Source), discounts (Other Financing Use), and bond issue costs (Expenditure – Debt Service) must be accounted for separately. Also, the bond is accounted for in the General Long-Term Liabilities accounts.

17. Supplemental Order Supplemental order for fuel and materials for project – over and above the cost of the contract.

18. Financing Received The State Grant is obviously not expenditure-driven – that is why it was all received up front. The funding from the General Fund (GF) may be received all at once or at various times, as is the case here.

19. Invoices received

20. Notes on the Invoices • Fuel and materials had been encumbered for $48,000, but actual cost was $49,000 • Machine Time is an allowable overhead cost • Construction in progress would be recorded in the General Capital Assets accounts

21. Notes on Invoices(continued) Retained Percentage • Done to insure completion of the project per the contract • Will be paid to contractor when final project is accepted • Alternate methods of insuring completion • Insurance policies • Certificates of Deposit (not subject to fair value rules from Chapter 5) • Bonding

22. Cash Disbursements

23. Federal Grant Reimbursement

24. Note on Federal Grant Reimbursement • Could be billed each time allowable charge incurred • Amount received may be less than amount billed if Federal Government does not allow all expenditures

25. Interest on Investments

26. Closing Entries • Year-end closing entries not particularly relevant to CPFs – more concerned with life of project than by end of year • Financial statements then become interim statements for CPFs

27. Accounts Not Closed Use worksheet to create pro forma closing entries which aren’t posted to accounts Financial statements prepared from worksheet – just like normal Accounts Closed Use same routine as used in earlier chapters Closing entries typically result in artificial deficits Appropriated fund balance reported for unexpended amounts Options for Closing Entries

28. CPF Financial Statements • Required • Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balance [Operating Statement] • Optional • Budgetary statement or schedule • Not required under GAAP but may be required by government, rating agencies, or bondholders

29. Balance Sheet x • Note different sections in the Fund Balance section • Appropriated • Unappropriated • Unrealized estimated revenues or transfers from other funds are not assets – leads to Unreserved Fund Balance artificial deficit – need to explain deficit in notes to financial statements

30. Operating Statement x • Same format as used for other Governmental Funds • Negative excess causes some readers to think change in financial position is poor – artificial since much of financing comes from “other” sources

31. Completing the Bridge: Year 2 Reverse some of adjusting/closing entries made in previous year – gets budgetary accounts back in balance

32. Invoices Received

33. Cash Receipts

34. Cash Disbursements

35. Settlement with the Feds: Part I

36. Settlement with the Feds: Part II

37. Final Settlements

38. Project Operating Statement • Governments usually report one year at a time • With completed project, reporting all revenues and expenditures could be useful – helps explain the artificial deficits from earlier year(s) x

39. Other CPF Issues • Bond anticipation notes • Investment of idle cash • Disposing of fund balance (deficit) • Reporting several projects in single fund • Combining CPF financial statements

40. Bond Anticipation Notes (BANs) Reasons for use • Time lag in issuing approved bond issue when cash is needed immediately to start the project • Interest rates on the decline, so postponing issuing bonds will save the government money

41. Issue the BANs • BANs were issued at par – since the term is short, this will usually be the case. • The issuance can be recorded as if it were long-term debt so long as two conditions exist: • The project has an authorized bond issue. • The government will repay the BANs from the bonds, once they are issued. • There will be a corresponding liability in the General Long-Term Liabilities accounts for the BANs.

42. Issue Bonds(same entry from earlier) Recall that as a result of this event, the Bonds Payable will be recorded in the General Long-Term Liabilities accounts.

43. Repay the BANs At the same time the BAN principal will be removed from the General Long-Term Liabilities accounts.

44. Investments & Arbitrage • A significant amount of cash can flow through a CPF – cash flow planning is a must • Issuing bonds early in project may be mandated – need to invest proceeds to maximize interest

45. Arbitrage The difference in the amount earned on investing bond proceeds and amount paid in interest on the bonds – since most governments issue tax-exempt debt, this amount can be significant.

46. Arbitrage and Taxes • Tax rate on arbitrage is simple: 100% • Penalty rate on not paying tax correctly is almost as simple: 50% • Rules are quite complex: governments must manage money and watch arbitrage requirements to minimize problems

47. Remaining Fund Balance • If cash is left over when project is complete, difference is usually transferred to DSF to assist in repaying amounts borrowed • If project is in deficit (not enough cash) • Additional transfers needed from other funds OR • Scope of the project must be cut back

48. Reporting Multiple Projects • Government may elect to use single fund to report many projects • Easiest way to combine information is to prepare separate statements for each project, then consolidate for reporting purposes

49. Combining CPF Statements • Used when government uses separate CPF for each project • Individual statements must still be prepared to complete other statements included in CAFR (see CAFR preparation process in Chapter 2) • Combining statements prepared to facilitate this process – may be part of other combining statements for all governmental funds

50. City of Orlando, FL, Example • Part of a larger statement for all nonmajor Governmental Funds • Other funds included are Community Redevelopment Agencies (combine features of SRFs, DSFs, and CPFs) and Special Revenue Funds • Total (not shown) is for all nonmajor Governmental Funds x