CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS Robert J. Lynch, CPA, Partner

Transcription

1 ACCOUNTING FOR MASSACHUSETTS CLEAN WATER TRUST (formerly MWPAT) LYNCH, MALLOY, MARINI, LLP CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS Robert J. Lynch, CPA, Partner

2 Background: The Trust has been referred to as the MWPAT herein. The Trust provides financing under the following programs: Clean Water Program provide financing for projects to assist municipalities in complying with the federal Clean Water Act. Drinking Water Program provide financing to assist communities in achieving the standards for water treatment set forth in the Safe Drinking Water Act of Typically funds: treatment filtration construction and upgrade, transmission pipeline construction, storage and new source development. Title 5 Community Septic Management Program - to assist homeowners in complying with the requirements of Title 5 of the Clean Water Act, through low interest loans through MWPAT loans provided to communities.

3 Background: Clean Water Program and Drinking Water Program most common currently. The Massachusetts Department of Environmental Protection (DEP) determines which potential projects within a community should be undertaken based upon an evaluation of environmental and public health issues. Approved projects receive Project Approval Certificate (PAC) from DEP, sent to the Trust (Board of Trustees) to vote and approve a loan commitment. Loan commitment sent to the community along with a loan questionnaire which must be returned to the Trust. Also required a legal opinion from community s counsel (green light letter) must be submitted. DEP issues Project Regulatory Agreement (PRA) after community has awarded the contract for the project. Submits to the Trust. The Board of Trustees (Trust) votes to approve a loan to the community. The Trust mails loan document to the community (borrower) for execution. If borrower wants interim financing, (included in the loan agreement package), must be completed and returned with origination fee to the Trust.

4 Background: Origination fee on interim loan 1/10 of 1% of the interim loan amount, subject to minimum $500 and maximum $1,000. Interest on interim loans is generally referred to in the Trust s Financing Agreements rate of 50% of the MMDT published in the MMDT Cash portfolio, using most recent available (commencing January 1 and July 1). Borrower is responsible for all local issuance costs (i.e. bond counsel, financial advisors, etc). Borrower is charged pro-rata amount of the Trust s costs of issuance at the time the Trust issues bonds to permanently finance the borrower s loan. The Trust issues bonds as the Trust deems necessary. Generally, executed loan agreements are permanently financed in the next round of bond issuance of the Trust; assumes no significant delays in the project. The Trust generally requires the borrower to expect completion of the project within by the two year anniversary (24 months) of the project s permanent financing.

5 Background: With the original loan documents the Trust provides what it calls a draft Schedule C which provides an estimate of the total debt service on the principal of the loan being issued. When the project is permanently financed with proceeds of bonds issued by the Trust, a Final Schedule C is provided. This is based upon the actual amount financed and the debt service the Trust is required to pay on the bonds. Debt service payments are due February 1 and August 1. Borrowers are required to pay an annual administrative fee of.075% of the outstanding principal amount for permanently financed loans. This is paid at the semi-annual due dates. Trust loans have been set by the Legislature at 2%. After receiving an interim or permanent loan for a project, and following the incurrence of eligible costs, the borrower submits a disbursement request to DEP. DEP reviews the request. Once approved, it is submitted to the Trust for payment.

6 Background: The Trust, once approved requests are received, the payment is generally processed on a weekly basis. Uniform Massachusetts Accounting System (UMAS) Guides addresses MWPAT loans in Appendices H-1 ( for pools #1-#10) and H-2 (pools beginning with 11).

7 The following example and recommendations will be addressed for a Town maintaining the obligation i in awater enterprise fund - July 1, 20X1-June 30, 20X2. Budgetary entries will not be presented for the purposes of this presentation. Note: Net Position (formerly net assets) has been used for enterprise fund. Fund balance accounts apply for governmental funds. Fund and account numbers have not been shown, as UMAS account structure is illustrated within ihi the UMAS Guide. Water Capital Project Fund is utilized to account for the project - referred to as Water CP. EXAMPLE: Town T Meeting has authorized $3.0 million water infrastructure t project, to financed through a MWPAT loan. Town to receive interim financing of $1.0 million, September 1, 20X1. Permanent financing March 20X2. Related Rltdproject expenditures are incurred as follows: fll October 15, 20X1 $1,000,000 April 1, 20X2 $400,000 May 1, 20X2 $400,000

8 Entry to record Town s authorization of the project: Recorded din the water enterprise fund General llong Term Obligation i Account Group (LTOAG) Memorandum entry: Dbi Debit: Water- Bonds Authorized d(m (Memo) 3,000,000 (Credit): Water -Bonds Authorized Offset (unissued) (Memo) (3,000,000) Entry to record interim financing received (proceeds) to the Town to finance project expenditures pending permanent (long term) financing i at September 1, 20X1: Debit: Water CP -Cash-unrestricted 1,000,000 (Credit): Water CP -Bonds Anticipation Notes Payable (1,000,000) In accordance with UMAS reduce authorization to borrow: Debit: Water- Bonds Authorized - Offset (unissued)(memo) 1,000,000 (Credit): Water - Bonds Authorized (Memorandum) (1,000,000) Lynch, Malloy, Marini, LLP Certified Public Accountants & Advisors

9 Entry to record payment to General Contractor -project expenditures October 15, 20X1 Debit: Water CP Net Position (expenditures) 1,000,000 (Credit): Water CP Cash-unrestricted (1,000,000) Sbidi Subsidiary: Water CP Project expenditures 1,000,000 Water CP subsidiary appropriation control (1,000,000)

10 REMEMBER: The issuance of interim/temporary notes there is no subsidiary entry to Other Financing Source (OFS). Temporary borrowings provide inflow of CASH not other financing source which closes to equity.. Often recorded incorrectly as follows: Debit: Water CP Cash -unrestricted 1,000,000 (Credit): Water CP Net Position (1,000,000) Subsidiary: Water CP subsidiary revenue control 1,000,000 Water CP OFS- Debt proceeds (1,000,000)

11 ASSUME PERMANANET FINANCING BY MWPAT The MWPAT provides permanent financing through bond issuance. Interim loans and interest are paid off at the time the bond is issued. Bond obligation (principal) is recorded at the date of issuance in the general ledger. The MWPAT holds the amount of the bond in an account at the MWPAT designated for the entity. UMAS manual refers to this account as account #1065 Cash on Deposit MWPAT Often reflected in ledgers and financial statements component of receivables: Amounts Due from MWPAT Unrecorded Drawdowns from MWPAT NOTE: Unrecorded Drawdown from MWPAT will be used in this example..

12 EXAMPLE CONTINUED: The MWPAT has permanently financed the agreement with the Town; final permanent financing documents signed, $3.0 million obligation overall. $1.0 million funds received via interim obligation outstanding. Entry to record permanent financing March 1, 20X2, is as follows: Debit: Water CP Cash 1,000,000 Debit: Water CP -Unrecorded Drawdown with MWPAT 2,000,000 (Credit): Water CP -Net Position (3,000,000) Subsidiary: Water CP subsidiary revenue control 3,000,000 Water CP-Bond Proceeds MWPAT (3,000,000)

13 EXAMPLE CONTINUED: Entry to record the repayment of the interim loan and associated interest (assumed $14,000). Note that all interest is paid from the appropriate fund (General or enterprise). In this example, the Water Enterprise Fund. In this example the interest is paid by the water enterprise fund. Debit: Water CP Bond Anticipation Notes Payable 1,000,000 (Credit): Water CP Cash unrestricted (1,000,000) Debit: Water Fund- Net Position (expenditure control) 14,000 (Credit): Water Fund Cash unrestricted (14,000) Subsidiary: Debit: Water Fund expense- Interest on Notes 14,000 (Credit): Water Fund subsidiary appropriation control (14,000) Lynch, Malloy, Marini, LLP Certified Public Accountants & Advisors

14 EXAMPLE CONTINUED: Entries to the Water Enterprise Fund General Long Term Obligation Account Group: Recording of bonds payable in the Water LTOAG: Debit: Water -Amounts to be provided for Payment of Bonds 3,000,000 (Credit): Water - Bonds Payable MWPAT (3,000,000) Memorandum entry: Accounting for remaining reduction in outstanding debt/bond authorizations: Debit: Water-Bonds Authorized Offset (unissued) (Memo) 2,000,000 (Credit): Water -Bonds Authorized (Memo) (2,000,000)

15 EXAMPLE CONTINUED: The Town pays the General Contractor for additional project expenditures. The following illustrates entry to record project expenditures. Date April 1, 20X2. Assume the same scenario for May 1, 20X2. Debit: Water CP- Net Position (expenditures control) 400,000 (Credit): Water CP Cash- unrestricted (400,000) Subsidiary: Debit: Water CP Project expenditures (contractor expense) 400,000 (Credit): Water CP subsidiary appropriation control (400,000)

16 EXAMPLE CONTINUED: The Town draws amounts from the MWPAT (amount of cash being held on hand at the MWPAT). Note: generally, the Town has 24 months to drawdown on the loan. In the event the entire loan has not been drawn within this period, new agreements are generally signed with the lower principal p amount and new amortization (repayment) schedules. Undrawn/unspent balance may be a new agreement if needed by Town. The following illustrates entries to record drawdown for the additional project expenditures. Assume same for May 1, 20X2. To record receipt of MWPAT drawdown date: April 30 and May 30, 20X2: Debit: Water CP- Cash-unrestricted 400,000 (Credit): Water CP Unrecorded Drawdown from MWPAT (400,000) Subsidiary: Debit: Water CP Project expenditures (contractor expense) 400,000 (Credit): Water CP subsidiary appropriation control (400,000)

17 EXAMPLE CONTINUED: The following illustrates the balance in the Unrecorded Drawdown from MWPAT (cash on hand at MWPAT) account at June 30, 20X2 assuming presented scenario: Unrecorded Drawdown from MWPAT (cash on hand at MWPAT): Balance March 31, 20X2 $ 2,000,000 Drawdown received April 31, 20X2 (400,000) Drawdown received May 31, 20X2 (400,000) No activity June 20X2 - Balance June 30, 20X2 $ 1,200,000

18 EXAMPLE CONTINUED: The following illustrates the balance (net position) of the overall water project at June 30, 20X2 assuming the presented scenario: Water Project: Balance September30, 20X1 $ - Project expenditures October 15, 20X1 (1,000,000) Balance October 31, 20X1 (1,000,000) Permanent financing March 1, 20X2 3,000,000 Balance March 31, 20X2 2,000,000 Project expenditures April 1, 20X2 ( 400,000) Balance April, 30, 20X2 1,600,000 Project expenditures May 1, 20X2 ( 400,000) 000) Balance May 31, 20X2 1,200,000 No activity for June 20X2 - Balance June 30, 20X2 $ 1,200,000

19 EXAMPLE CONTINUED: Payment of principal i and interest on the MWPAT bond: As with all long term bonds, the principal and interest associated with MWPAT bonds is appropriated and paid from the appropriate operating fund (General fund or enterprise fund). Debt service expenditures are not charged to capital project funds. The following illustrates the entries associated with debt service payments: Assume: Principal payment = $200,000 and interest = $96,000. Dbit Debit: Water Fund (operating) Net Position (expenditures) 296,000 (Credit): Water Fund (operating) Cash unrestricted (296,000) Subsidiary Dbit Debit: Wt Water Fund d( (operating) expenses Maturing Principal i 200, Debit: Water Fund (operating) expenses Interest on LT Debt 96,000 (Credit): Water Fund (operating) subsidiary approp. Control (296,000)

20 EXAMPLE CONTINUED: Memorandum entry to the General Long Term Obligation Account Group Debit: Water -Bonds Payable MWPAT 200,000 (Credit): Water -Amounts to be provided for Payment of Bonds (200,000)

21 EXAMPLE CONTINUED: ASSUME UNSPENT BOND PROCEEDS AT END OF PROJECT Assume at June 30, 20X3, the Town has completed the project and has unexpended bond proceeds of $50,000. Assume monies no longer needed. At June 30, 20X3, balance in the Unrecorded d drawdowns d (cash on hand at MWPAT) account and Net Position in the Project account would both equal $50,000. The following entry illustrates recording the remaining amount not needed. Debit: Water CP- Net Position 50,000 (Credit): Water CP- Unrecorded Drawdowns at MWPAT (50,000) Sbidi Subsidiary: Debit: Water CP Bond Proceeds 50,000 (Credit): Water CP subsidiary revenue control (50,000)

22 EXAMPLE CONTINUED: NOTE: For financial reporting purposes, debit to bond proceeds in the subsidiary ledger as illustrated in UMAS Guide would generally expected to be reflected as an Other Financing Use (OFU) with appropriate financial statement footnote disclosure. Example: Repayment of unspent MWPAT bond principle, or similar description. The following illustrates t Memorandum entry in LTOAG: Debit: Water Bonds Authorized (Memo) 50,000 (Credit): Water Bonds Authorized Offset (unissued) (Memo) (50,000)

23 How are Trust loans subsidized and what does it mean? Actual debt service on the loan depends upon the interest rate received by the Trust on the bonds it issues to permanently finance the loan. Loan subsidy is equal to the difference between the market rate on the bonds and the 2% that the borrower pays. The borrower is legally obligated to repay the total debt service on the loan. Under State law, the Trust is required to apply subsidies against a portion of this debt service obligation.

24 See copy of an actual Schedule C for MWPAT obligation with subsidy: Total Principal Net Principal Principal Subsidy Total Interest Net Interest Interest Subsidy $9,246,673 $8,973,373 $273,300 $6,881,022 $3,855,580 $3,025,442 Community s subsidy: Per Schedule C -source of subsidy: Interest subsidy $3,025,442 Equity earnings $2,079,137 Principal subsidy 273,300 MA subsidy** 1,219,605 Total subsidy $3,298,742 Total provided $3,298,742 ** contract assistance subject to annual appropriation

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26 Debt service is in the Long Term Obligations Account Group at gross. In fiscal years in which the community receives a subsidy what is the actual effect? (see for illustration final year August 1, 2033) Debit: Debt service expense- principal 69,406 Debit: Debt service expense interest 13,850 (Credit): Intergovernmental revenue subsidy (83,256) Note: Subsidies may be of material amounts. Important for financial team to track and evaluate for financial reporting purposes.

27 COMMUNITY SEPTIC MANAGEMENT PROGRAM: General: Communities participating in the Community Septic Management Program enter into State Revolving Fund Loan (SRF) with the Trust. The Trust makes low interest rate loan to communities, which in turn loan the funds directly to eligible homeowners for up to 20 years. Prior to state fiscal year 2014, the program was funded through a separate appropriation by the State Legislature. The program has now been rolled into the Clean Water SRF. FY 2014 the Trust provide (8) loans totaling approximately $3.0 million. (source: 2014 Clean Water Trust Annual Report). Eligibility each municipality must obtain authorization (2/3 Town Meeting, City Council approval vote appropriating the funds for purpose of septic repairs, and authorizing the borrowing).

28 COMMUNITY SEPTIC MANAGEMENT PROGRAM: General: The loan to the homeowner is secured through a betterment agreement with the homeowner (MGL Chapter 111, Section 127B ½). The community only repays the amount borrowed (drawn down). 5% interest can be charged on the betterment loan to the homeowner provides cash flow to the community. Repayment of the loan by the community begins in the second year of the program to allow homeowners to begin making payments. Communities can require repayment of betterment loans sooner (i.e. SRF loan is for 20 years; betterment agreement is for 10 years).

29 COMMUNITY SEPTIC MANAGEMENT PROGRAM: General: A separate special revenue account established to account for the Title 5 Program. (UMAS Fund #276) Accounts for: receipts: proceeds of the loan. disbursements: fees of engineers, contractors, inspectors for work at the home. A separate account established (SRF) receipts reserved for appropriation MWPAT Loan Repayment. (UMAS Fund #277) Accounts for: receipts: collections of betterments through tax billing and lump sum payoff of betterment balances. Repayments are not General Fund receipts. disbursements: loan payments to the MWPAT. Annual appropriation would be for the payment of the MWPAT loan using funds in this account. The MWPAT is a general obligation of the municipality and must be paid regardless of any collections.

30 COMMUNITY SEPTIC MANAGEMENT PROGRAM: Assume the following: Community has authorized CSMP authorize $100,000. (For illustrative purpose ignoring memorandum entries) Entry to record the community receiving $100,000 from the MWPAT, executing a note: Debit: Cash Title 5 Loan Program (Fund #276) 100, (Credit): Other Financing Sources (Fund#276) (100,000) Entry to record the bond in the General Long Term Obligation Account Group: Debit: Amounts to be provided for payment of bonds 100,000 (Credit): Bonds Payable outside debt limit MWPAT (100,000)

31 COMMUNITY SEPTIC MANAGEMENT PROGRAM: The following entry illustrates the community making payments to contractors and inspectors for repairs to septic systems: Debit: Expenditures (Fund#276) 100,000 (Credit): Cash (Fund#276) (100,000) 000)

32 COMMUNITY SEPTIC MANAGEMENT PROGRAM: The following entry illustrates loan to residents (for illustration) assumed entire amount for multiple loans. Debit: Apportioned Assessments Not Yet Due (Fund#277) 100,000 (Credit): Deferred Revenue Special Assessments (Fudn#277) (100,000) The following entry illustrates the first payment of homeowners loan due: Debit: Apportioned Assessment ATT (Fund #277) 20,000 Debit: Committed Interest ATT (Fund#277) 1,000 (Credit): Apportioned Assessment Not Yet Due (Fund#277) (20,000) 000) (Credit): Deferred Revenue Special Assessments (Fund#27) (1,000)

33 COMMUNITY SEPTIC MANAGEMENT PROGRAM: The following entry illustrates residents payments to amounts included in tax bill for loan and committed interest: Debit: Cash (Fund #277) 21,000 (Credit): Apportioned Assessment ATT (Fund#277) (20,000) (Credit): Committed Interest ATT (Fund#277) (1,000) The following entry illustrates recognizing the revenue associated with the loan payments. Debit: Deferred Revenue Special Assessments (Fund#277) 21,000 (Credit): Revenue (Fund#277) (21,000)

34 COMMUNITY SEPTIC MANAGEMENT PROGRAM: The following entry illustrates the community s annual payment of debt service to MWPAT: Debit: Expenditures (Fund#277) 10,000 (Credit): Cash (Fund #277) (10,000) The following entry illustrates reduction in the GLTOAG for the payment to MWPAT: Debit: Bonds Payable Outside Debt Limit - MWPAT 10,000 (Credit): Amounts to be Provided for Payment of Bonds (10,000) 000)

35 RECOMMENDATIONS: Extremely important to keep detailed records. These obligations can get confusing with the interim and permanent financing, swap outs of undrawn balances after 24 months, etc. Coordinate with financial team, public works, financial advisors, etc. to ensure efficient planning of the process. Ensure routine process to monitor activity to submit DEP requests (draw downs) in timely manner. (i.e. a lot of paperwork). Important for Accountant and Treasurer to maintain detailed records of the entity s outstanding debt, inclusive of subsidies. Ensure the records are maintained by activity and Fund type. Inquire of the Trust at least annually for record of the community s activity. The Trust is very helpful in providing information and assistance when asked.

36 QUESTIONS?

37 LYNCH, MALLOY, MARINI, LLP Certified Public Accountants & Advisors CONTACT INFORMATION: ROBERT J. LYNCH, CPA.- PARTNER 99 Longwater Circle, Suite 200 Norwell, MA Tel Norwell: 99 Longwater Circle, Suite 200, Norwell, MA Tel (781) Brewster: 9 Baystate Court, Brewster, MA - Tel (508) Natick: 41 West Central Street, Natick, MA - Tel. (508)

38 ACCOUNTING FOR MA. CLEAN WATER TRUST This presentation and any recommendations contained therein are the recommendations and representations of Lynch, Malloy, Marini, LLP personnel based upon interpretations of the UMAS Guide, Division of Local Services bulletins and guidance, MWPAT agreements and materials, accounting and auditing standards, professional experience and recommended best practices. These representations are not designed to, nor intended to serve as a pronouncement or standard by any government agency, accounting standards board or a legal determination of any kind. Additionally, this presentation is not designed to be all inclusive, addressing all accounting and reporting issues and scenarios associated with Massachusetts Clean Water Trust obligations. The examples of loan obligation amounts, and associated estimates of interest, subsidies, repayment schedule and other activity contained herein are presented for informational and illustrative purposes only, and do not reflect actual amounts or associated activities i i of the Massachusetts Clean Water Trust (formerly known as the Massachusetts Water Pollution Abatement Trust). Lynch, Malloy, Marini, LLP Certified Public Accountants & Advisors