MMC Budget Administration & Financial Oversight 4 — Questions and Answers
Question 1: A municipality is considering issuing Tax Anticipation Notes (TANs). What is the primary purpose of this borrowing instrument?
- To fund long-term capital improvements
- To bridge cash flow gaps while awaiting property tax collections (Correct answer)
- To refinance existing general obligation bonds at lower rates
- To finance pension obligation catch-up payments
Correct answer: To bridge cash flow gaps while awaiting property tax collections
TANs are short-term borrowings used to manage cash flow between the start of the fiscal year and when property tax revenues are collected.
Question 2: A city's fund balance policy requires maintaining a minimum of 15% of general fund expenditures in the unassigned fund balance. If expenditures are $10 million, the minimum reserve is:
- $1 million
- $1.5 million (Correct answer)
- $2 million
- $750,000
Correct answer: $1.5 million
15% of $10 million in expenditures equals $1.5 million, which is the minimum unassigned fund balance required by this policy.
Question 3: What distinguishes an 'assigned' fund balance from a 'committed' fund balance under GASB 54?
- Assigned balances require a formal ordinance; committed balances require only management action
- Committed balances require formal governing body action; assigned balances can be set by management or the governing body (Correct answer)
- Assigned balances are legally restricted; committed balances are discretionary
- There is no practical difference between the two classifications
Correct answer: Committed balances require formal governing body action; assigned balances can be set by management or the governing body
GASB 54 requires that committed fund balances be established by the highest level of decision-making authority (governing body) through formal action, while assigned balances can be designated by management.
Question 4: A municipal clerk is reviewing the Comprehensive Annual Financial Report (CAFR). Which section contains the auditor's opinion on the financial statements?
- Introductory section
- Statistical section
- Financial section (Correct answer)
- Supplementary information section
Correct answer: Financial section
The financial section of the CAFR contains the independent auditor's report, management's discussion and analysis, and the basic financial statements.
Question 5: When comparing a municipality's budget to actual results, an unfavorable variance in revenues means:
- Actual revenues exceeded budgeted revenues
- Actual revenues fell short of budgeted revenues (Correct answer)
- The budget was not legally adopted before the fiscal year
- Revenue categories were misclassified in the budget
Correct answer: Actual revenues fell short of budgeted revenues
An unfavorable revenue variance means actual collections were less than projected, potentially requiring expenditure reductions or use of reserves.
Question 6: Which type of municipal bond is backed solely by the revenue generated by a specific project or enterprise, rather than the government's taxing power?
- General obligation bond
- Revenue bond (Correct answer)
- Tax increment financing bond
- Special assessment bond
Correct answer: Revenue bond
Revenue bonds are repaid from the income produced by the funded project (e.g., water fees, toll revenues) and do not pledge the full faith and credit of the municipality.
Question 7: A municipality's internal auditor reports directly to the city manager. From a governance perspective, what concern does this raise?
- The internal auditor cannot audit financial statements
- Independence may be compromised since the auditor reports to the chief executive being audited (Correct answer)
- Internal auditors must report to the external auditor, not management
- This structure violates GAAP requirements for local governments
Correct answer: Independence may be compromised since the auditor reports to the chief executive being audited
Internal audit independence is strengthened when auditors report to the governing body or audit committee rather than management, to avoid conflicts of interest.
MMC Budget Administration & Financial Oversight 4
A municipality is considering issuing Tax Anticipation Notes (TANs).
What is the primary purpose of this borrowing instrument?