A city agrees to extend water and sewer lines to an outlying community. To cover the cost, the affected property owners agree to special assessments of $12 million. The assessments are to be paid over five years, with interest at the rate of 6 percent per year. For each of the following situations describe how the city should account for the special assessment debt.
1. The city finances the project by issuing special assessment bonds. The bonds are to be repaid with the special assessment revenues, which the city will account for, as received from property owners, in a debt service fund. The newly constructed lines will be accounted for as general capital assets.
2. The project is financed by bonds issued by a specially created municipal utility district, which is not part of the city’s financial reporting entity. Although the city is to construct and own the lines, the utility district is responsible for collecting the assessments and making all required principal and interest payments. The city has no explicit responsibility for the debt but has indicated to the bond underwriters in a letter that it accepts a “moral obligation’’ to assume the debt in the event the municipal utility district defaults.
3. The project is financed by bonds issued by a specially created municipal utility district, which is not part of the city’s financial reporting entity. The city has agreed to collect the assessments and make all required principal and interest payments on behalf of the municipal utility district. The city is constitutionally prohibited from assuming responsibility for this type of debt.
4. The project is carried out, and the bonds are issued by the city’s water and sewer utility, which is accounted for in an enterprise fund.