capital projects funds

Capital Projects Funds

Chapter 7

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.

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

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

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

CPF Life Cycle

20X2 20X3

Repay

General Long-Term

Debt Issue Proceeds

Short-Term Debt

Issue Proceeds

Interfund

Transfers

Interest &

Other Revenues

Inter-Governmental

Grants

THE CAPITAL PROJECTS FUND

Fund

Terminated

Project

Authorization

Capital

Expenditures

Capital

Expenditures

Refunds

Debt Service

Fund

Unused

Proceeds

Debt Issue

General Capital Assets

&General Long-Term Liabilities Accounts

Legend

Resource FlowsOther Funds or Accounts Affected

Life Cycle: Step-by-step

Project authorization and duration

CPF extends over life of project

Financing

Expenditures

Termination of CPF

Records retention

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

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

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

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

Interim Financing Comparison

Short-Term Borrowing BAN Financing

Cash 50,000 Cash 50,000

Notes Payable 50,000 OFS -- BAN Principal 50,000

Expenditures -- Capital Outlay 50,000 Expenditures -- Capital Outlay 50,000

Cash 50,000 Cash 50,000

Unreserved Fund Balance 50,000 OFS -- BAN Principal 50,000

Expenditures -- Capital Outlay 50,000 Expenditures -- Capital Outlay 50,000

Interim Financing Comparison(continued)

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

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

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)

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

CPF Case Illustration

Project Financing

Total Percent

Federal Grant 1,200,000 40

State Grant 600,000 20

Bond issue 900,000 30

Transfer from General Fund 300,000 10

TOTAL 3,000,000 100

Budget entry [Page 270]

Estimated Revenues – Federal Grant

Estimated Revenues – State Grant

Estimated OFS – Bonds

Estimated OFS – Transfer from General

Fund

Appropriations – Bean & Co.

Contract

Appropriations – Labor

Appropriations – Machine Time

Appropriations – Fuel & Materials

1,200,000

600,000

900,000

300,000

2,400,000

300,000

200,000

100,000

#1 Sign Contract [Page 271]

Encumbrances – Contract

Reserve for Encumbrances

2,400,000

2,400,000

#2 Issue Bonds at a Premium[Page 271]

Cash

Expenditures – Bond Issue Costs

OFS – Bond Principal

OFS – Bond Premium

909,000

2,000

900,000

11,000

GCA GLTL NA– =

$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.

#3 Supplemental Order [Page 271]

Encumbrances – Fuel & Mat.


55,000

55,000

#4 Financing Received [Page 271]

Cash

Revenues – State Grant

OFS – Transfer from GF

730,000

600,000

130,000

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.

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



Encumbrances – Fuel &

Mat.

1,048,000

1,000,000

48,000

#5b Invoices received –record the actual [Page 271]

Expenditures – Fuel & Mat.

Expenditures – Machine Time

Expenditures – Contract

Contracts Payable –

Retained Percentage

Vouchers Payable

49,000

81,000

1,000,000

50,000

1,080,000

GCA* GLTL NA– =

$1,130,000 $1,130,000

*Construction in Progress

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

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

Cash Disbursements

Vouchers Payable

Investments

Expenditures – Labor

Cash

970,000

400,000

140,000

1,510,000

GCA* GLTL NA– =

$140,000 $140,000


Federal Grant Reimbursement

Due from Federal Government

Revenues – Federal Grant

508,000

508,000

Qualifying Expenditures

Payment to contractor

Fuel & materials

Machine time

Payroll

Total Qualifying Expenditures

Allowable percentage

Allowable charge

1,000,000

49,000

81,000

140,000

1,270,000

40%

508,000

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

Interest on Investments

Accrued Interest Receivable

Revenues – Interest

18,000

18,000

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

Options for Closing Entries

Accounts Not Closed

Use worksheet to create pro formaclosing 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

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

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

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

Completing the Bridge: Year 2

Reverse some of adjusting/closing entries made in previous year – gets budgetary accounts back in balance

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



Encumbrances – Fuel & Mat.

1,407,000

1,400,000

7,000

#1b Invoices Received –record the actual [Page 280]

Expenditures – Contract

Expenditures – Fuel & Mat.

Expenditures – Machine Time

Contracts Payable –

Retained Percentage

Vouchers Payable

1,410,000

43,000

108,000

70,500

1,490,500

GCA* GLTL NA– =

$1,561,000 $1,561,000


#2 Cash Receipts [Page 280]

Cash

Due from Federal Gov.


Investments

Revenues – Interest

OFS – Transfer from GF

1,798,000

508,000

690,000

400,000

30,000

170,000

#3 Cash Disbursements [Page 280-1]

Vouchers Payable

Expenditures – Labor

Cash

1,600,500

129,000

1,729,500

GCA* GLTL NA– =

$129,000 $129,000


Settlement with the Feds: Part I [Page 281]

Allowable Costs

Bean & Co. Contract

Labor

Machine Time

Fuel & Materials

Total Allowable Costs

Less: Interest Earned

Net – basis for billing Feds

2,400,000

269,000

189,000

92,000

2,950,000

30,000

2,920,000

Settlement with the Feds: Part II [Page 281]

Net – basis for billing Feds

Federal Grant Share

Amount owed by Feds

Federal Grant Revenue

recognized to date

Due to Federal Government

2,920,000

40%

1,168,000

1,198,000

30,000

#4 Amount Owed to Feds [Page 281]



30,000

30,000

#5 Final Settlements [Page 281]

Contracts Payable – Retained

Percentage


OFU – Transfer to DSF

Cash

120,500

30,000

47,000

197,500

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)

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

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

Issue the BANs

Cash

OFS – BAN Principal

500,000

500,000

GCA GLTL* NA– =

$500,000 – $500,000

*BANs Payable

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

Issue Bonds(Same entry from Page 271)

Cash

Expenditures – Bond Issue Costs

OFS – Bond Principal

OFS – Bond Premium

909,000

2,000

900,000

11,000

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.

Repay the BANs

OFU – BAN Principal Retirement

Expenditures – Debt Service –

Interest

Cash

500,000

30,000

530,000

GCA GLTL* NA– =

– $500,000 $500,000

*BANs Payable

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

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.

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

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

Reporting Multiple Projects

Government may elect to use single CPF to report many projects

Easiest way to combine information is to prepare separate statements for each project, then consolidate for reporting purposes

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

capital projects funds

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