A city’s visitors’ bureau, which promotes tourism and conventions, is funded by an 8 percent local hotel occupancy tax (a tax on the cost of a stay in a hotel). Because the visitors’ bureau is supported entirely by the occupancy tax, it is accounted for in a restricted fund. You recently received a call from the director of the visitors’ bureau. She complained that the city manager is about to impose an overhead charge of a specified dollar amount on her department. Yet the statute creating the hotel occupancy tax specifies that the revenues can be used only to satisfy ‘‘direct expenditures’’ incurred to promote tourism and bookings at the city’s convention center. The manager says that she understands that the city is having difficulty balancing its budget, but she fails to see how the charge to her department will do much to alleviate the city’s fiscal problems.
1. In light of the city’s fiscal problems, what is the most likely motivation for the new charge? Will the new overhead charge achieve its objective?
2. What would be the impact of the new charge on the city’s annual fund financial statements, prepared in accordance with GAAP (which requires that the city account for its governmental funds on a modified accrual basis)? Would the impact be the same if the city accounted for its governmental funds on a cash basis?
3. What would be the impact of the new charge on the city’s government-wide statements, in which all governmental funds are consolidated? Would it have an impact on reported net position?
4. In what way might the charge have a substantive impact on the city’s economic condition?
5. Assuming that the city provided accounting, legal, and purchasing services to the visitors’ bureau, do you think the charge would be consistent with the statutory requirement that the hotel occupancy tax be used to meet only ‘‘direct expenditures’’ related to tourism and use of the convention center (an issue not addressed in this text)?