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Unformatted text preview: Chapter 6 Solutions to Cases 6-1. a. We recommend that the substance of a students brief be emphasized more than its form. The key issues that students should identify in this case are: (1) Should property owners have to bear the full cost burden for improvements that have public as well as private benefit? (2) Should the government have the power to create a special improvement district without approval of a majority of affected property owners? As in any ambiguous situation involving subjective evaluation, students may reach different verdicts. So, each students work should be assessed on the quality of analysis and how well he or she supports his/her verdict, rather than on the verdict itself. Verdict: In the verdict on which this case is based, the court ruled for the plaintiffs on the grounds that the city failed to show that property owners benefited substantially from the street widening project. Further, the project was found to have significant public benefit; therefore, the judge ordered the city to use public taxes to pay a majority of the cost of the project. As a result of this case, the city adopted a new and, many would argue, fairer policy for financing future capital projects that provide both public and private benefit. Further, the revised city ordinance requires a public hearing for all special assessment and other public improvement projects, as well as public notification in local newspapers. b. If, as in this case, the government provides secondary backing for special assessment bonds, then accounting and financial reporting are not affected by who pays the debt service on the project. Issuance of the bonds is recorded as an other financing source in the capital projects fund and as general long-term liabilities at the government-wide level, regardless of who pays debt service on the bonds. Moreover, capital projects fund accounting and reporting for street construction would not be affected by the verdict. Ch. 6, Solutions, Case 6-1 (Contd) Even debt service fund accounting is unaffected by the verdict since the city had agreed to make the bonds general obligations of the city should property owners default on special assessments. If, however, the special assessment bonds did not have the secondary backing of the city and the court did not rule for the plaintiffs, then accounting and reporting would be very different. In the capital projects fund, the change would be minortitling the other financing source as Contributions from Property Owners rather than Proceeds of Bonds. In this changed scenario, the liability for the bond issue would not be recorded at the government-wide level as the city has no obligation for the debt. In addition, all debt service activities would be reported in an agency fund (see Chapter 8 for more discussion.) All of this is academic, however, since the court did rule for the plaintiffs, which essentially converts the project into a normal capital project, accounted for and reported as described in this chapter. accounted for and reported as described in this chapter....
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- Summer '11