Question

The U.S. Environmental Protection Agency (EPA) requires owners of municipal solid waste land fills to demonstrate that they are financially capable of satisfying the costs of closing and subsequently caring for the land fills that they operate. Per EPA regulations, one way for a local government to demonstrate financial capability is by satisfying certain financial standards. In particular, a government must meet the following four ratio targets:
• Cash plus marketable securities to total expenditures must be greater than or equal to 0.05
• Annual debt service to total expenditures must be less than or equal to 0.20
• Long-term debt issued and outstanding to capital expenditures must be less than or equal to 2.00
• Current cost estimates for closure, post-closure, corrective action to total revenue must be less than or equal to 0.43 The regulations provide no interpretative guidance except to imply that the ratios are to be based on financial statements prepared in accordance with generally accepted accounting principles.
Suppose you are engaged as a consultant to a state agency that has to administer the regulations. In the course of examining the evidence of financial capability supplied by municipal landfill operators, state officials raised the fol lowing questions as to how the ratios should be calculated:
1. Should the ratios be based only on a government's general fund or should they encompass funds in addition to the general fund?
2. Assuming the ratios should not be based exclusively on the general fund, should they include proprietary funds (i.e., does use of the term expenditures imply that expenses should be excluded)?
3. Should the ratios incorporate restricted as well as unrestricted funds?
4. Should capital expenditures include only those for the year in question, or an average of several years?
a. Propose answers to these questions that you believe are most consistent with the EPA's objective of assuring financial capability. For each question, recommend an appropriate policy, justify it, and cite any potential limitations.
b. Suggest at least three additional questions that you believe need to be addressed.



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  • CreatedAugust 13, 2014
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