December 1, 1988

TO: County Administrators, Controllers, Finance Directors, Clerks,

Drain Commissioners and Treasurers

FROM: Richard L. Baldermann

Administrator

Local Audit and Finance Division

RE: GASB No. 6, Effect on Regular Drain Fund Accounting

The Governmental Accounting Standards Board has issued Statement No. 6 titled "Accounting and Financial Reporting for Special Assessments." The provisions of Statement No. 6 are effective for financial statements for periods beginning after June 15, 1987.

Statement No. 6 has eliminated the Special Assessment Fund Type. Those funds that were accounted for and reported in the Special Assessment Fund Type are now reported in the fund type that best reflects the nature of the activity and transactions.

Drain, Revolving Drain, Drain Maintenance Revolving, Lake Level and Lake Level Revolving Funds construction phases are reported in the Capital Projects Funds. Transactions for repair and maintenance are also recorded in the Capital Projects Funds. The fund numbers for these funds remain unchanged but will be reported along with the other Capital Projects Funds of the county.

Debt service transactions for the Drain and Lake Level Funds are recorded in Debt Service Funds. Drain Debt Fund (851) and Lake Level Debt Fund (891) are established for these transactions.

The amount of the debt is to be recorded in the Long-Term Debt Account Group. Time drain orders and Drain Code Section 434 (MCL 280.434) loans whose original maturity is more than one year after the issuance date are recorded in the Long-Term Debt Account Group. Current drain orders payable and section 434 loans whose original maturity is one year or less are reported as liabilities in the applicable Capital Projects Fund.

Regular drain and Lake Level Funds infrastructure assets such as ditches, tile drains, pumps and items of equipment should not be capitalized. Large expenditures for equipment or buildings in Drain or Lake Level Funds should be capitalized in the General Fixed Assets Account Group.

Sample journal entries of common transactions for the Drain and Lake Level Funds are listed for your guidance.

Note: The new procedures requires that disbursements from the revolving funds are immediately reported as an expenditure in the fund receiving the service and the establishment of the receivable and liability in the applicable funds. The entry to record the repayment to the revolving fund is debit the 214 account "Due To Other Funds" and credit cash in the assessment funds. The revolving fund entries are a debit to the cash account and credit to the "Due From Other Funds," account 084.

Special assessments receivable are recorded in the Debt Service Fund with the offset to Deferred Revenue, account number 339. If the property owner is given the option to pay the assessment in full after the sale of bonds, the total payment is removed from the special assessments receivable account, the deferred revenue account and is recognized as Special Assessment revenue. An optional method of recording the advance payment follows. The amount of the advance payment for current debt service is recorded as Special Assessment Revenue, account number 672. The portion of the advanced payment that is to pay future debt service is credited to account number 333 titled "Assessments Collected in Advance." Each year the 333 "Assessments Collected in Advance" account is debited and the 672 Special Assessment Revenue account is credited for the applicable amount for that year's debt service. The county must maintain a subsidiary record by property description and tax levy year for the amount of the special assessments receivable. The total of this subsidiary record must be reconciled periodically but at least annually to the general ledger balance of the special assessments receivable control account.

We have assigned fund numbers 851 "Drain Debt Fund" and 891 "Lake Level Debt Fund" to account for debt service transactions for these funds. The drain commission office must maintain a separate subsidiary ledger for each drainage district and lake level that has debt service transactions. These subsidiary ledgers are in addition to the ledgers you are now keeping for each drain or lake level district. These subledgers should be segregated from other drain ledgers by a tab in the existing binder or in a separate binder. This procedure is recommended for simplicity when totaling individual cash and special assessments receivable balances for each district when reconciling to the general ledger control account.

The debt service subledgers should include the special assessment receivable balance, amount of unpaid debt, current year's special assessments collected, interest from assessments and investments, principal, interest and debt service costs paid and a cash balance.

Please call or write our office if you have any questions, (517) 373-3227, Michigan Department of Treasury, Local Audit and Finance Division, P.O. Box 30728, Lansing, MI 48909-8228.

Following are fund and account descriptions:

Account Number 333, Assessments Collected in Advance--This account is used to record the advance payment of special assessments received from individuals whose property is in a special assessment district. This advance payment is made after the bonds are sold and is in lieu of annual installment payments. The balance of this account is the amount that is to be used for payment of future years' principal. Subsidiary accounts must be maintained for this account for the amount of each advance payment by property description.

This account is:

CREDITED--with the amount of the advances received.

DEBITED--annually with the amount applicable for that year's assessment installment.

NOTE: Some projects financed from the sale of bonds that are repaid with special assessments levied against the benefited property may allow the property owner to pay the special assessment prior to the issuing and sale of bonds in order to reduce the amount of bonds necessary to finance the project. These advance payments are recorded as Special Assessment Revenue, account number 672 in the applicable capital projects or enterprise fund.

PURPOSE--This fund is used to record the payment of interest and principal on long-term debt, the proceeds of which were used to construct, repair and maintain county drains.

CHARACTER--This fund is classified as a debt service fund (special assessment district) and is used only for the payment of principal and interest on bonds sold to construct and maintain county drains.

DISTINGISHING FEATURES--This fund is usually found in county government.

AUTHORIZATION AND ESTABLISHMENT--This fund must be established to record the transactions for the debt service on bonds, drain orders and Drain Code section 434 borrowing whose original maturity is more than one year after the issuance date. A subsidiary fund must be maintained for each drainage district that has long-term debt outstanding.

OPERATION AND PRESENT USE--The revenue for this fund is supplied by: (a) accrued interest from the sale of bonds; (b) a special assessment levied specifically for the retirement of the debt; and (c) the residue remaining after completion of the project when specified in the bond ordinance.

This fund is subject to budgetary requirements of Public Act 2 of 1968, as amended.

PURPOSE--This fund is used to record the payment of interest and principal on long-term debt, the proceeds of which were used to construct, repair and maintain lake level projects.

CHARACTER--This fund is classified as a debt service fund (special assessment district) and is used only for the payment of principal and interest on bonds sold to construct and maintain lake level projects.

DISTINGUISHING FEATURES--This fund is usually found in county government.

AUTHORIZATION AND ESTABLISHMENT--This fund must be established to record the transactions for the debt service on bonds and lake level orders whose original maturity is more than one year after the issuance date. A subsidiary fund must be maintained for each lake level that has outstanding long-term debt.

OPERATION AND PRESENT USE--The revenue for this fund is supplied by: (a) accrued interest from the sale of bonds; (b) a special assessment levied specifically for the retirement of the debt; or (c) the residue remaining after completion of the project when specified in the bond ordinance.

This fund is subject to budgetary requirements of PA 2 of 1968, as amended.