Chapter 10: State and Local Governments Accounting

Unique characteristics about the government

• Resources are derived from property, sales taxes, fees, fines, and other related sources

• No ownership interests

• They must adhere to a legal budget (expenditures cannot exceed budgeted amounts)

• Financial resources are often restricted for a particular use

• The main purpose is to provide services to citizens, usually a nonprofit basis

• Governmental Accounting Standards Board (GASB) sets accounting requirements for external reporting

Who are the main users of governmental financial statements?

• Credit market representatives

• Citizens, typically those from budget advisory groups and “watchdog” organizations

• Elected and appointed officials of the government

• Supervisory levels of government, such as a state controller

• Public sector labor unions

_________ establishes current GAAP for state and local governments, including not-for-profit organizations owned by or related to the government

The Governmental Accounting Standards Board (GASB)

True or False: GASB follows the same due process as the FASB

True

Examples of GASB Publications

• Standards

• Concepts statements

• Interpretations

• Technical bulletins

• Implementation guides

GASB Statement No. 76 establishes two categories of authoritative governmental accounting principles. What is Category A?

Officially established accounting principles—GASB Statements

GASB Statement No. 76 establishes two categories of authoritative governmental accounting principles. What is Category B?

GASB Technical Bulletins, GASB Implementation Guides, and GASB-approved AICPA literature

Objectives of Financial Reporting | Concepts Statement No. 1

Government financial reports should respond to the needs of the citizenry, their representatives, and investors and creditors involved in the lending process

Objectives of Financial Reporting | What are the four uses of financial reports?

1. Compare actual financial results with the legally adopted budget (accountability!)

2. Assess financial condition and results of operations

3. Determine compliance with finance-related laws, rules, and regulations (accountability!)

4. Evaluate efficiency and effectiveness

What are the categories of government activities?

• Governmental Activities

• Proprietary Activities

• Fiduciary Activities

Governmental Activities

• Benefit the government or its citizens

• Consist primarily of services

What services primarily make up governmental activities?

• Health and safety

• Education

• Economic services

• Culture and recreation

• Legislative services

What are the primary sources of funding for governmental activities?

• Property, income, and state taxes

• State and federal aid

Look at the following activities:

• Collection of taxes, fees, and fines

• Issuance of bonds; repayment of bond principal/interest

• Provision of primary services for which little or no user fees are collected (education, public safety, social and judicial services, administration)

• Acquisition, construction, and disposition of long-lived assets (financed either by general resources, special assessment, or long-term debt)

• Special projects benefiting the public (funded by grants or other restricted resources)

What category of activities do these fall under?

Governmental

Proprietary Activities

• Similar to activities of a business (provide goods and services primarily financed by user fees; users are citizens or other government departments)

• User fees are usually set to approximate the cost of goods and services provided

Look at the following activities:

• Utilities

• Public transportation

• Toll roads

• Parking facilities

• Recreational facilities

• Hospitals

• Colleges/universities

• State lottery

What category of activities do these fall under?

Proprietary

True or False: Provision of goods and services for which a cost-based fee is collected from the public, such as a motor pool and central supplies, is directly tied to proprietary activities

True

Fiduciary Activities (General)

• Government holds financial resources in trust/a custodial capacity for entities or individuals outside the governmental unit

• Financial resources are collected for, and eventually disbursed to, another government unit

Fiduciary Activities | Examples of financial resources held in trust for those outside the government unit

• Pension plan for government employees

• Investment pools for other governments

Fiduciary Activities | Examples of financial resources collected for, and eventually disbursed to, another government unit

• State sales taxes collected by the county

• Special assessments on specific property owners

Fund Accounting

• The government uses multiple funds to record activities

• Each fund has its own set of books and financial statements

• The financial statements are presented in the Annual Comprehensive Financial Report (ACFR) for external reporting, including fund-based and government-wide financial statements

Fund Structure | Why do governments keep money in separate, locked “buckets” instead of one giant bank account?

• Accountability

  • Public funds demand strict public trust. Separating transactions ensures that citizen taxes and dedicated revenues are never mixed or mismanaged.

• Mini-Companies

  • Each fund operates as an independent fiscal entity with its own separate balance sheet and operating statement (e.g., tracking a specific highway construction project)

• Legal Compliance

  • Laws, grants, and bond covenants place strict restrictions on money. Fund structures make it easy for auditors to monitor compliance and prevent illegal reallocations.

Funds achieve ____________ for and stewardship ____________ resources

Accountability; over

Accounting Segregation of Financial Resources | What is the general function of Fund Balance or Net Position?

• Measures the difference between a fund’s assets and liabilities

• Represents resources available to spend

Accounting Segregation of Financial Resources | What are the two overarching parts of Fund Balance or Net Position?

• Unassigned portion — indicates financial resources available for unrestricted spending

• 1+ designated portions — amounts not available for expenditure or legally segregated for specific future uses

What are the three fund types?

• Governmental Funds

• Proprietary Funds

• Fiduciary Funds

Governmental Funds

Account for most traditional governmental functions, and report on resources available to finance activities that will benefit the government or its citizens

Proprietary Funds

Account for a government’s ongoing business-like activities that are similar to those found in the private sector, where fees are charges for goods provided or services performed

Fiduciary Funds

Account for resources held by the government unit in a trustee or custodial capacity on behalf of individuals or other organizations outside the governmental unit, and which cannot be used to support the government or its operations

What are the types of governmental funds?

• General Funds

• Special Revenue Funds

• Capital Projects Funds

• Debt Service Funds

• Permanent Funds

The ___________ accounts for all financial resources of a government, except those required to be accounted for in another fund

General Fund

True or False: General Funds cover the routine, ongoing operations and services provided to citizens that are not legally or contractually restricted to a specialized fund

True

General Fund | What are the resources dervied from?

• Property and sales taxes

• General state aid

• Fees, fines, and other general revenues

General Fund | What are the resources used for?

• City administration

• Police, fire protection, and courts

• Streets, parks, and sanitation

• Other general services

True or False: Not all governments have a general fund

False

There is typically a __________ between the size of the general fund and the number of other funds

Trade-off

Special Revenue Fund

• A specialized governmental fund used to account for the proceeds of specific revenue sources that are legally restricted or committed to expenditure for specified purposes other than debt service or capital projects

A special revenue fund is set up whenever…

A specific stream of money must be used for a very exact purpose by law, policy, or outside mandate

Special Revenue Funds | Key Characteristics

• Legal Restriction: The money flowing into this type of fund has “strings attached”

• “Lifespan”: Stays active as long as the underlying activity or revenue source continues

Special Revenue Funds | What are the (often recurring) resources derived from?

• State or federal aid for specific purposes

• Taxes levied for certain purposes

• Grants

Special Revenue Funds | What are common examples of revenues and their associated uses?

• Gasoline tax → Highway construction and repair

• Hotel tax → Tourism promotion

• Hunting license → Wildlife management

• Park fees → Park maintenance

• Rental car tax → Tourism and convention promotion

Special Revenue Funds | Why do governments use them?

Transparency and Compliance: They provide clear, isolate proof to taxpayers and regulators that legally restricted revenues were actually spent on those exact items and not diverted to cover a budget shortfall in general administration

Capital Project Fund

• A governmental fund used to account for and report financial resources that are restricted, committed, or assigned to spend on capital outlays

• Set up to finance and track the acquisition, construction, or major renovation of major long-lived public assets, such as public buildings, bridges, parks, or large-scale municipal infrastructure

Capital Project Funds | Key Characteristics

• Project-Specific Lifespan

• Typically not financed by routine daily taxes

Capital Project Funds | Major resources include…

• Primarily from proceeds from bond issues

• Special assessments on property owners

• State or federal aid

• Allocation of general fund revenues

• Special tax assessment

• Private donation

Capital Project Funds | They account for amounts to fund…

Construction or acquisition only

Capital Project Funds | What do they NOT account for?

• Fixed Assets (or associated depreciation)

• Debt service costs or bond payable liabilities

• Proprietary fund projects

• Short-term construction (accounted for in general fund)

The capital project fund is __________, meaning that it is closed when the project is complete

Expendable

Capital Project Funds | Common examples of when this type of fund would be used

• Constructing a new public high school or library

• Building a new city hall or police station

• Undertaking a major city-wide street paving and storm drainage overhaul