CMO Financial Management & Budgeting 5 — Questions and Answers
Question 1: A municipality discovers mid-year that revenues will fall $2 million short of projections. The appropriate corrective action is to:
- Issue revenue anticipation notes to cover the gap
- Adopt a mid-year budget amendment reducing appropriations (Correct answer)
- Transfer from the pension fund to cover operations
- Defer all capital spending to the next fiscal year without council action
Correct answer: Adopt a mid-year budget amendment reducing appropriations
A formal mid-year budget amendment approved by the governing body is the legally required mechanism to reduce appropriations when revenues fall short.
Question 2: The Governmental Accounting Standards Board (GASB) is responsible for:
- Setting federal grant compliance requirements
- Establishing GAAP for state and local governments (Correct answer)
- Auditing municipal financial statements
- Issuing municipal bond ratings
Correct answer: Establishing GAAP for state and local governments
GASB establishes and improves Generally Accepted Accounting Principles (GAAP) for U.S. state and local governmental entities.
Question 3: What is the primary purpose of a municipal investment policy?
- To maximize return on investment regardless of risk
- To establish guidelines for safety, liquidity, and yield of public funds (Correct answer)
- To authorize the CFO to invest in equities and hedge funds
- To comply with federal Securities and Exchange Commission rules
Correct answer: To establish guidelines for safety, liquidity, and yield of public funds
A municipal investment policy prioritizes preservation of principal (safety), then liquidity to meet cash flow needs, and finally yield — in that order.
Question 4: Which scenario best describes tax increment financing (TIF)?
- A property tax exemption granted to new businesses for 10 years
- Capturing the increase in property tax revenue within a redevelopment district to fund improvements (Correct answer)
- A state grant program for distressed municipalities
- A special levy approved by voters to fund school construction
Correct answer: Capturing the increase in property tax revenue within a redevelopment district to fund improvements
TIF districts capture incremental property tax growth above a baseline to fund public improvements within the district, without raising tax rates.
Question 5: A municipality's unassigned fund balance falls to 3% of annual revenues. Most financial best-practice guidelines recommend unassigned fund balance of at least:
- 1–2% of revenues
- 5–15% of revenues (often 2 months of expenditures) (Correct answer)
- 25–30% of revenues
- 50% of the debt service obligation
Correct answer: 5–15% of revenues (often 2 months of expenditures)
GFOA recommends governments maintain an unrestricted general fund balance of no less than two months (approximately 16%) of regular general fund operating revenues or expenditures.
Question 6: Which type of municipal audit provides an independent opinion on whether financial statements are presented fairly in accordance with GAAP?
- Performance audit
- Single audit
- Financial statement audit (Correct answer)
- Compliance audit
Correct answer: Financial statement audit
A financial statement audit conducted by an independent CPA firm expresses an opinion on whether financial statements fairly present the government's financial position per GAAP.
Question 7: Under the Single Audit Act, a municipality that expends $750,000 or more in federal awards in a fiscal year must:
- Submit a federal budget to the OMB for approval
- Undergo a single audit covering both financial statements and federal program compliance (Correct answer)
- Repay all federal grants within 90 days of year-end
- Obtain a bond rating from Moody's or S&P
Correct answer: Undergo a single audit covering both financial statements and federal program compliance
The Single Audit Act (2 CFR Part 200) requires a single, organization-wide audit of both financial statements and major federal program compliance when the $750,000 expenditure threshold is met.
CMO Financial Management & Budgeting 5
A municipality discovers mid-year that revenues will fall $2 million short of projections.
The appropriate corrective action is to: