GAC GAC Debt Management & Capital Financing 2 — Questions and Answers
Question 1: An advance refunding of municipal bonds involves:
- Paying off bonds immediately upon issuance of new bonds
- Issuing new bonds whose proceeds are escrowed to pay off existing bonds at a future call date (Correct answer)
- Renegotiating bond terms directly with existing bondholders
- Converting fixed-rate bonds to variable-rate obligations
Correct answer: Issuing new bonds whose proceeds are escrowed to pay off existing bonds at a future call date
In an advance refunding, new bonds are issued and proceeds placed in escrow to repay the original bonds at their first call date or maturity, which may be years away.
Question 2: Which GASB standard addresses accounting and financial reporting for debt refundings, requiring deferred recognition of the difference between the reacquisition price and the net carrying amount?
- GASB Statement No. 7
- GASB Statement No. 23 (Correct answer)
- GASB Statement No. 48
- GASB Statement No. 77
Correct answer: GASB Statement No. 23
GASB Statement No. 23 requires that the difference between the reacquisition price and the net carrying amount of refunded debt be deferred and amortized over the shorter of the life of the old or new debt.
Question 3: A government's debt limit is typically expressed as a percentage of:
- Annual operating revenues
- Total outstanding bond issuances nationwide
- Assessed or equalized property value (Correct answer)
- Federal grant receipts
Correct answer: Assessed or equalized property value
Most state constitutional debt limits for general obligation bonds are expressed as a percentage of the jurisdiction's total assessed or equalized value of taxable property.
Question 4: Tax Increment Financing (TIF) is a mechanism that funds redevelopment by:
- Increasing property tax rates in a designated district
- Capturing future increases in property tax revenues from a designated development area (Correct answer)
- Issuing bonds backed by state income taxes
- Using federal community development block grants
Correct answer: Capturing future increases in property tax revenues from a designated development area
TIF captures the incremental increase in property tax revenues generated by rising property values in a redevelopment area to finance the upfront infrastructure costs.
Question 5: Under GASB, which disclosure is required in the notes to financial statements regarding long-term debt?
- A schedule showing changes in long-term liabilities during the year, including additions, reductions, ending balances, and the due-within-one-year portion (Correct answer)
- Only the total outstanding principal balance
- A detailed credit analysis performed by the government's finance officer
- The identity of all individual bondholders
Correct answer: A schedule showing changes in long-term liabilities during the year, including additions, reductions, ending balances, and the due-within-one-year portion
GASB requires governments to disclose a roll-forward schedule of long-term liabilities showing beginning balances, increases, decreases, ending balances, and the portion due within one year.
Question 6: A government's debt-to-assessed-value ratio is used primarily to evaluate:
- The efficiency of the government's collection of property taxes
- The government's debt burden relative to its property tax base (Correct answer)
- The liquidity of the government's current assets
- The profitability of government enterprise activities
Correct answer: The government's debt burden relative to its property tax base
The debt-to-assessed-value ratio measures how much debt a government has outstanding relative to the total value of taxable property, indicating the government's capacity to support additional debt.
GAC GAC Debt Management & Capital Financing 2
An advance refunding of municipal bonds involves: