Question

An important feature of the financial statements of state and local governments is the two-layer reporting system. In addition to the traditional fund financial statements, the Governmental Accounting Standard Board (GASB) issued Statement No. 34 to add a new layer of reporting, the government-wide financial statements. The government-wide statements are presented using the full accrual basis of accounting and with the economic resources’ measurement focus. Combined with the fund level statements, the financial overview of the governmentwide financial statements provides a comprehensive evaluation of the overall financial condition and operating results of a government. City of Sugar Land in Texas is selected as a good example to illustrate the two-layer financial reporting system. Most students in our school are familiar with the city and its services, facilities, and infrastructures. It serves as an interesting case for students in learning its activities and accounting system. The city has a population of about 90,000, and its 2014-2015 budget is $181.59 million. It is a full-service municipality engaging in both governmental activities (i.e., police and fire protection, curbside recycling, parks and recreation, public works, planning / zoning) and business-type activities (i.e. water / wastewater utilities, solid waste collection, a regional airport). But the city does not have fiduciary activities. During the past years, the city has seen continuous economic growth, and has been named one of the top 50 best places to live in the US. The most recent CAFR can be obtained from the city’s website. After going over the general structure of the reports, the students are asked to focus on the financial section, including the management discussion and analyses (MD&A), government-wide financial statements and the governmental funds financial statements. Then, a written summary from each student is required to address the following questions.

1) What are the programs/functions reported in the Government-wide Statement of Activities? By how much has the city’s Net Position increased from the last fiscal year?

2) Why is fund accounting used in governmental accounting? Which types of governmental funds and enterprise funds does the city have?

3) What are the major revenues for the city’s governmental funds? What are the three major revenue sources for the city? How is sales tax collected by the city? What is franchise tax?

4) What is the revenue recognition policy for the city’s governmental funds? How is the policy different from revenue recognition in for-profit companies?

5) In which situation will the city issue bond? What sources can the city rely upon to make payments for the premium and interest related to the bond?

6) What is restricted fund? What are the examples of restricted fund in the city?

7) How does the city balance its budget, especially when the projected expenditures exceed the projected revenues?

8) What is an interfund transfer? Why are interfund transfers closely monitored by the government?

9) Why is reconciliation needed between the fund financial statements and governmentwide financial statements? Please give one or two example (s).

Answer 1

1. What are the Programs/Functions reported in Government - wide Statement of Activities ?

General Government

Administrative Services

Public Safety- Police

Public Safety-Fire

Public safety-EMS

Public Works

Parks and Recreation

Community Development

Environmental and Neighbourhood

Interest on Loag term Debt

Utility

Regional Airport

Solid Waste Management

How much has the city's Net Position Increased from the Last Fiscal Year ?

NET POSITION (Amount in 000's)
	2018	2019
Net Investment in Capital Assets	$        611,281	$        596,955
Restricted	$          29,305	$          33,367
Unrestricted	$          71,278	$          67,785
Total Net Position	$        711,864	$        698,107

The City's net position decreased by approximately $13.8 million ($13.757 million).

2. Why is fund accounting used in governmental accounting? Which types of governmental funds and enterprise funds does the city have?

A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into two categories: governmental funds and proprietary funds.


Government Funds: The City maintains 12 individual governmental funds:

	Major Governmental Funds:
1	General Fund
2	Debt Service Fund
	Non-Major Governmental Funds:
3	Tourism Fund
4	Court Security Fund
5	Community Development Block Grant Fund
6	Court Technology Fund
7	Law Enforcement Grant Fund
8	Photographic Traffic Enforcement Fund
9	Debt Reduction Funds
10	Sugar Land Development Corporation Fund
11	Enclave at River Park PID
12	Capital Projects Fund

Enterprise Funds: Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. There are 3 Enterprise Funds as follows:

	Major Enterprise Funds:
1	Utility Fund
2	Airport fund
	Non-Major Enterprise Funds:
3	Solid Waste Fund

3. What are the Major Revenues for City's Government Funds ?

Property Taxes	$         49,910,560
Sales Tax	$         47,349,948
Charges for Services	$           9,856,589
Franchises and Other Taxes	$           9,063,027

Together the above Source of Revenues account for 87% of Total Governmental Fund Revenues. There are total 9 sources of Governmental Fund Revenues.

The Three Major Revenue Sources for the City are:

Charges for services	$            88,170,000
Property Taxes	$            49,989,000
Sales Tax	$            47,581,000

What is Franchise tax ?

The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.

Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:

• corporations;
• limited liability companies (LLCs), including series LLCs;
• banks;
• state limited banking associations;
• savings and loan associations;
• S corporations;
• professional corporations;
• partnerships (general, limited and limited liability);
• trusts;
• professional associations;
• business associations;
• joint ventures; and
• other legal entities.

6) What is restricted fund? What are the examples of restricted fund in the city?

Amounts that are subject to external restrictions from creditors, grantors, contributors, or laws of other governments.

Examples of restricted fund in the city:

Debt Service Fund : Debt service	$              8,847,239
Tourism Fund : Tourism and Marketing	$              1,941,997
Court Security Fund : Public Safety	$                    18,703
Court Technology Fund : Public Safety	$                    26,310
Law Enforcement Grant Fund	$                  359,219
Debt Reduction Funds: Debt service	$              1,171,512
Sugar Land development Corporation Fund : Debt service and Economic Development Activities	$            11,142,588
Enclave at River Part PID : Debt service	$                    70,197
Capital Projects Fund : Capital Projects	$            22,113,944

7) How does the city balance its budget, especially when the projected expenditures exceed the projected revenues?

Annual appropriated budgets are adopted for the General Fund, Special Revenue Funds and Debt Service Funds, using the same basis of accounting as for financial reporting. All annual appropriations lapse at fiscal year end. Project length budgets are adopted for the Capital Project Funds. The City, for management control, approves a financial plan for the Enterprise and Internal Service Funds.

Expenditures may not legally exceed budgeted appropriations at the functional level (i.e. general government, administrative services, etc.). Expenditure requests that require an increase in total budgeted appropriation, must be approved by City Council through a formal budget amendment. At any time in the fiscal year, the Council may make emergency appropriations to meet a pressing need for public expenditure in order to protect the public health, safety, or welfare. The Council has the power to transfer any unencumbered funds allocated by the budget from one activity, function, or department, to another activity, function, or department, to re-estimate revenues and expenditures, and to amend the budget.

8) What is an interfund transfer? Why are interfund transfers closely monitored by the government?

Movements of assets between Funds within a organisation .
Example: Movement of Funds from Debt Service Fund to Tourism fund.

The Government closely monitors Interfund Transfer to ensure the Budgetary Complainces i.e, Budgeted Revenue Projected are not sufficient requiring Transfer from Other funds or Excess expenditure incurred.