Capital Projects Funds

1. Capital Projects Funds Chapter 7

2. Learning Objectives • Understand nature of and when to use CPFs • Understand typical CPF financing sources, how many CPFs are required, and life cycle of CPF • Determine costs to be charged to CPF • Understand basic budgeting and budgetary reporting for CPFs • Understand accounting for long-term debt issued in CPF, including bond proceeds and bond anticipation notes • 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. Issues Related to a CPF • Sources of financial resources • Number of CPFs required • CPF life cycle • Budgeting for a CPF • Interim financing • Costs charged to projects • Intergovernmental revenues • Bond premiums, discounts, & issuance costs

6. CPF Life Cycle

7. Life Cycle: Step-by-step • Project authorization and duration • CPF extends over life of project • Financing • Expenditures • Termination of CPF • Records retention

8. 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

9. 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

10. 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

11. 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

12. Interim Financing Comparison

13. Short-Term Borrowing Recorded as liability of fund Expenditure is for capital outlay May result 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)

14. Project Costs • Direct materials and labor, for self-constructed assets • 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 not capitalized • Long-term debt interest not capitalized

15. 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)

16. Bonds issued to finance project • Face amount recorded as OFS • For bonds not issued at par • Premium recorded as OFS – usually transferred to DSF • Discount recorded as OFU • Issuance costs are debt service expenditures • Discounts and issuance costs may require additional funding from other sources

17. CPF Case Illustration

18. Budget entry [Page 270]

19. #1 Sign Contract [Page 271]

20. GCA – GLTL = NA #2 Issue Bonds at a Premium[Page 271] $2,000 – $911,000 – $909,000 NOTE: Bond issue costs are not GCA, but are reported as noncurrent assets in the government-wide financial statements.

21. #3 Supplemental Order [Page 271]

22. #4 Financing Received [Page 271] 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.

23. #5a Invoices received – reverse the estimate [Page 271]

24. GCA* – GLTL = NA #5b Invoices received – record the actual [Page 271] $1,130,000 $1,130,000 *Construction in Progress

25. 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

26. 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

27. GCA* – GLTL = NA Cash Disbursements $140,000 $140,000 *Construction in Progress

28. Federal Grant Reimbursement

29. 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

30. Interest on Investments

31. 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

32. 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

33. 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

34. Balance Sheet • 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

35. Operating Statement • 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

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

37. #1a Invoices Received – reverse the estimate [Page 280]

38. GCA* – GLTL = NA #1b Invoices Received – record the actual [Page 280] $1,561,000 $1,561,000 *Construction in Progress

39. #2 Cash Receipts [Page 280]

40. GCA* – GLTL = NA #3 Cash Disbursements [Page 280-1] $129,000 $129,000 *Construction in Progress

41. Settlement with the Feds: Part I [Page 281]

42. Settlement with the Feds: Part II [Page 281]

43. #4 Amount Owed to Feds [Page 281]

44. #5 Final Settlements [Page 281]

45. 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)

46. 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

47. 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

48. GCA – GLTL* = NA Issue the BANs $500,000 – $500,000 *BANs Payable

49. Notes on Issuing BANs • BANs issued at par – since the term is short, this is usually the case • Issuance can be recorded as if it is 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 is a corresponding liability in the GLTL accounts for the BANs

50. Issue Bonds(Same entry from Page 271) Recall that as a result of this event, the Bond Issue Costs, Bond Payable, and Bond Premium are recorded in the GCA and GLTL accounts.