Hull City established a public housing authority (PHA) to fund the construction of low-income residential homes within city limits. The PHA is governed by a nine-person board of trustees. New trustees are nominated by the board but must be formally appointed by the city council. However, the council has never rejected a board nominee. The trustees have complete responsibility for the PHA’s day-to-day operations but are required to obtain city council endorsement of the PHA’s annual budget and must submit audited annual financial statements to the council. The PHA is permitted to issue its own debt, which is guaranteed by the federal government.

Approximately 90% of the PHA’s day-to-day operating costs are paid by the Department of Housing and Urban Development (HUD, a federal agency) and 10% by the city.

The sources of the funds used by the PHA to perform its functions are as follows:

• Authority-issued bonds (which are repaid by tenant rents): 60%

• Direct federal subsidies: 30%

• Direct city subsidies: 10%

1. Should the city include the PHA in its reporting entity as a component unit per the provisions of GASB Statement No. 14? If so, how? Explain your response.

2. Assume the same facts, except that the PHA does not directly fund the construction of homes. Instead, it lends money to the city’s housing department, which, in turn, lends the funds to home buyers. How, if at all, does your response to question 1 differ?

3. Assume the same facts as for question 1, except that the city council serves as the PHA’s board of trustees. How, if at all, does your response differ? Explain.