CMO Financial Management & Budgeting 4 — Questions and Answers
Question 1: A municipality's debt service coverage ratio for a revenue bond is 1.05. This means the project's net revenue covers debt payments by:
- 5% below the required amount
- 5% above the required amount (Correct answer)
- 105 times the required payment
- Exactly the required amount plus 5 cents per dollar
Correct answer: 5% above the required amount
A coverage ratio of 1.05 means net revenues are 5% greater than required debt service payments, providing a thin but positive margin.
Question 2: Which fund type accounts for resources held by a government in a trustee or custodial capacity for others?
- Special revenue fund
- Capital projects fund
- Fiduciary fund (Correct answer)
- Permanent fund
Correct answer: Fiduciary fund
Fiduciary funds (pension trusts, investment trusts, private-purpose trusts, and custodial funds) hold resources for the benefit of parties outside the government.
Question 3: A city manager wants to ensure that unspent appropriations in departmental budgets lapse at year-end rather than carry over. This practice:
- Violates GASB encumbrance standards
- Encourages responsible annual spending discipline (Correct answer)
- Requires a charter amendment
- Creates a permanent fund balance designation
Correct answer: Encourages responsible annual spending discipline
Annual appropriation lapse policies prevent departments from hoarding unspent funds, encouraging efficient use of resources within the budget year.
Question 4: What is the function of an encumbrance in municipal budgeting?
- To record actual expenditures when goods are received
- To reserve budget authority for outstanding purchase orders and contracts (Correct answer)
- To transfer excess funds between departments
- To record depreciation on capital assets
Correct answer: To reserve budget authority for outstanding purchase orders and contracts
Encumbrances set aside a portion of appropriation authority when a purchase order or contract is executed, preventing over-commitment of the budget before actual payment.
Question 5: Under GASB 87, how must municipalities account for most lease agreements lasting more than 12 months?
- As operating expenses in the year paid
- Recognize a right-of-use asset and corresponding lease liability (Correct answer)
- Disclose in footnotes only with no balance sheet impact
- Capitalize at historical cost with straight-line depreciation
Correct answer: Recognize a right-of-use asset and corresponding lease liability
GASB 87 requires governments to recognize a right-of-use asset and lease liability on the statement of net position for leases exceeding 12 months.
Question 6: A city levies a special assessment to fund a sidewalk improvement project. This cost is appropriately charged to:
- General fund operating revenues
- A special assessment debt service fund (Correct answer)
- The enterprise fund for utilities
- The pension trust fund
Correct answer: A special assessment debt service fund
Special assessment funds account for the financing of public improvements or services where benefiting property owners are assessed a proportionate share of the cost.
Question 7: Which financial metric best measures a municipality's ability to pay its current obligations from liquid assets?
- Debt-to-assessed-value ratio
- Current ratio (current assets / current liabilities) (Correct answer)
- Operating margin percentage
- Fund balance as a percent of revenues
Correct answer: Current ratio (current assets / current liabilities)
The current ratio compares current assets to current liabilities and measures short-term liquidity — a government's ability to cover near-term obligations.
CMO Financial Management & Budgeting 4
A municipality's debt service coverage ratio for a revenue bond is 1.05.
This means the project's net revenue covers debt payments by: