BACKGROUND
Governments often create separate legal entities to perform some of the functions normally associated with or performed by government. These separate entities may themselves be governmental entities or they may be not-for-profit or for-profit organizations. Sometimes these separate organizations are created to enhance revenues or reduce debt service costs of governments. Other times, these separate organizations are created to circumvent restrictions to which the state or local government would be subject. The following are some examples of these other organizations that are commonly created by a government:
• A separate public authority that operates as a utility, such as a water and sewer authority, may be created as a separate legal entity. Because a utility such as the water and sewer authority has a predictable revenue stream (the water and sewer charges to its customers), the utility will likely be able to sell debt in the form of revenue bonds, pledging the water and sewer charge revenues to the debt service on the revenue bonds. Because of this identification of a specific revenue stream, it is likely that the revenue bonds issued
by the authority will carry a lower interest rate than general obligation bonds issued by the local government.
• A housing finance authority may be created to finance the construction of moderately priced housing. The rental income on the constructed rental units can be correlated with the debt of the housing finance authority, again resulting in a lower interest cost to the government. The debt issued by the housing finance authority is likely to be issued without requiring a bond resolution approved by the voters of the jurisdiction. The existence of the housing finance authority expedites the government’s flexibility as to when and how much debt it issues. In a related use of a financing agency, the state or local government may be approaching its statutory limit on its ability to issue debt. If the housing finance authority’s debt is not included in the state or local government’s debt limit calculation, the state or local government avoids having the debt issued by the housing finance authority count against its debt limit, even though the state or local government may have chosen to issue the debt itself.
• In some instances, a not-for-profit organization can be invested with powers that might require a constitution or charter amendment. For example, an economic development authority may be established to buy, sell, or lease land and facilities, assist businesses within the jurisdiction, or negotiate and facilitate tax rate reductions to encourage businesses to remain in or relocate to the jurisdiction. Usually this separately incorporated entity is able to assume more powers and operate with greater flexibility than the state or local government itself.
The types and purposes of these entities continue to expand as governments seek to facilitate operations and to enter new service areas needed by their constituents. The above are but a few examples of the types of entities and areas of responsibility that the financial statement preparer and auditor are likely to encounter.
Taken From : Governmental Accounting Made Easy