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
Understand arbitrage and how to account for
it
Prepare CPF financial statements
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Why Use Capital Projects

Funds?

CPFs used to account for financial

resources that are used to
construct/ acquire major, longlived general capital facilities or
other capital assets
Examples
Buildings
Highways and bridges
Storm water drainage systems
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When CPFs Are

Required

When capital outlay is financed

from general obligation bond
proceeds
When legally or contractually
required

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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
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Issues Related to a
CPF
1.
2.
3.
4.
5.
6.
7.
8.

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, and issuance
costs
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CPF Life Cycle

General Long-Term
Debt Issue Proceeds

Short-Term Debt
Issue Proceeds

Interfund
Transfers

Interest &
Other Revenues

Inter-Governmental
Grants
Refunds

Project
Authorization

Fund
Terminated

Repay

THE CAPITAL PROJECTS FUND

20X2

20X3

Capital
Expenditures

Unused
Debt Issue
Proceeds

Capital
Expenditures

Debt Service
Fund

General Capital Assets

&
General Long-Term Liabilities Accounts

Legend
Resource Flows
Other Funds or Accounts Affected

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Life Cycle: Step-byStep

Project authorization and duration

CPF extends over life of project
Financing
Expenditures
Termination of CPF
Records retention
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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
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Other Notes on Life

Cycle

CPF may last for several fiscal

yearswhatever is 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
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10

Budgeting for a Capital

Project

Usually prepared for the life of the

projectappropriations 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
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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
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Interim Financing
Comparison
Short-Term Borrowing

Cash

NotesPayable

Expenditures--CapitalOutlay

Cash

UnreservedFundBalance

Expenditures--CapitalOutlay

BAN Financing

50,000

Cash

50,000

50,000

Expenditures--CapitalOutlay

50,000

50,000

OFS--BANPrincipal

50,000

OFS--BANPrincipal

Cash

Expenditures--CapitalOutlay

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50,000

50,000

50,000

50,000

50,000

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 outno
artificial deficit

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14

Project Costs

Direct materials and labor, for selfconstructed assets

Overhead
General government overhead rarely
charged unless reimbursable
Other overhead may be chargedcosts
from ISFs or incremental overhead from
project

Interest
Short-term debt interest is not capitalized
Long-term debt interest is not capitalized
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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)
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16

Bonds Issued to Finance

Project

Face amount recorded as OFS

For bonds not issued at par
Premium recorded as OFSusually
transferred to DSF
Discount recorded as OFU

Issuance costs are debt service

expenditures
Discounts and issuance costs may
require additional funding from other
sources
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CPF Financial
Statements

Required
Balance Sheet
Statement of Revenues, Expenditures, and
Changes in Fund Balance (Operating
Statement)

Optional
Budgetary statement (reported in
Supplementary Information section in
CAFR)
Not required under GAAP but may be
required 2013
byPearson
government,
rating
agencies,
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or bondholders

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
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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
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Investments and
Arbitrage

A significant amount of cash can

flow through a CPFcash flow
planning is a must
Issuing bonds early in project may
be mandatedneed to invest
proceeds to maximize interest

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

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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
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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
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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
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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 processmay be part of
other combining statements for all
governmental
funds
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