This chapter has two project. One has to do with paying off a long term debt from borrowing and the other is related to a pension operating fund and its solvency.
Remember, with the liquidity nature of governmental accounting, long term debt is not accounted for in the general fund of the balance sheet. Long term debt is placed in a group, called General Long Term Debt Account Group (GLTDAG). In this case, the long term debt is all general obligation, backed by the full faith and credit of the government. The debt is a result of capital improvements and some operating costs.
The related spreadsheet shows the GLTDAG. For this assignment, complete the following:
*For the budget, assume that the current $35,000 available will earn 4% for five years. Assume also that the government has been adding $2000 per year and will continue to do so at the beginning of the year for the next five years (an annuity). For interest earnings on the $2000 (annuity), take 4%. In essence, you need to figure whether the amount available and the annual transfer will be enough to meet the principal when due five years from now. If not, your budget must show what action to take. See also exercises and demonstration, paying off debt for more on the type of calculations needed. Ignore interest payments on the outstanding principal (assume that interest is coming out of the current operating budget as expressed in the statement of revenues, expenditures and change in fund balance).
The related financial statements are the GLTDAG and the debt service fund. These are given below.
Government
Balance Sheet -- General Long Term Debt Account Group
12/31/19x0
Assets:
Amount Available and to be Provided For
Term Bonds
amount available in DSF 35000
amount to be provided 100000
Total available and to be provided 135,000
Liabilities:
General Obligations Payable
Term Bonds 135,000
Total Liabilities and fund equity 135,000
The entire amount of the term bonds is due in five years from now. Also, see the Debt Service Fund where the money is actually accumulated to pay off the debt. The GLTDAG is simply a place to list the debt; here it is backed in part by the full faith and credit of the government.
In this assignment you will deal with the operating results (revenues, expenditures and change in fund balance) for a pension fund (usually called a public employees' retirement fund). The fund, as presented, is highly simplified.
In this assignment, you are to:Assumptions: Assume that the operating expenses have been growing by about 5% per year, while revenue has been growing by about 2%. The investments in the balance sheet are carried at cost (not market); 1/10 of the investments are in undeveloped land. It is growing by 4%. The projected benefits payable are growing by 7%. The net amount of equipment goes down by $100 per year. Assume that any increased deficit over last year has to come out of investments and put into cash to keep cash at $500. We will cover these extrapolations in class.
*Discuss the political implications of your recommended changes and how you will get them passed by the legislative and executive branches. Consider also the possibility that a large part of the workforce is unionized.
Financial Statements of PERF
Public Employee Retirement Fund
Statement of Revenues, Expenses and Change in Fund Balance
For the Fiscal Year Ended 12/31/19x0
Operating Revenue:
member contributions 4500
employer contributions 8000
investment income 1000
Total revenue 13500
Operating Expenses:
annuity benefits 10000
disability benefits 2500
admin. cost 500
Total expenses 13000
Net income 500