Considerations Involving a Service Concession Arrangement. You are a town council member in the seaside town of Pleasantville. Poor economic conditions and unusually severe weather conditions have affected tourism in the town, leading to significantly reduced sales, income, and hotel resort tax collections. Town revenue is 50 percent below budget, while expenditures remain constant at budgeted levels; hence, a sizable budget deficit is imminent. A group of investors has approached the town council with a proposal to take over operations of metered parking areas and the municipal beach parking garage for 20 years. In return for the anticipated parking revenues, the town will receive a $1 million up-front payment and retain full ownership of the parking operations at the end of the agreement. The town will also have some control over rates charged and will collect parking fines assessed. The town will continue to make debt payments related to the garage construction.
You perform some research and find that two larger cities in a neighboring state entered into a similar arrangement to mixed reviews. While city officials were praised for balancing their budgets and spending additional funds on local government programs, drivers complained about higher rates and frequent meter and parking garage malfunctions.
1. What questions do you have about the proposal?
2. Evaluate the proposal on a long-term and short-term basis.
3. How do you think the agreement would affect the city’s bond rating?
A. How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities?
B. What disclosures about long-term liabilities are required in the notes to the financial statements?
C. What is the purpose of a debt service fund? Does a debt service fund require budgeting? Why or why not?
D. Although the most common type of general long-term liabilities are those arising from financing activities (e.g., bonds, notes, and capital leases), general long-term liabilities can also be created through operating activities. Provide examples of long-term liabilities other than those related to financing.
E. What is overlapping debt? Why would a citizen care about the amount of overlapping debt reported? Why would a government care about the amount of overlapping debt reported?
F. Governments are prevented from borrowing unlimited funds through the enforcement of debt limits. Explain the concept of a debt limit. How are debt limits computed? How is the concept of borrowing power or debt margin connected to debt limits?
