HOW DO I FINANCE MY CAPITAL PROJECTS?
Consult Debt Experts and Legal Counsel
General Obligation Bonds
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Purpose of General Obligation Bonds
o Refund Bonds
o Fund Judgments
o Raise money for any purpose which the school district is authorized to spend
funds
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Limitations
o 60% voter approval
o Not exceed 50 year term
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Source of funding for repayment is a separate tax levy.
Capital Outlay Certificates
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Not in excess of 1 ½ % of assessed valuation
o Authorized at meeting
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Exceeds 1 ½ % of assessed Valuation
o Requires Public Notice
o Requires a Hearing
o Referable to vote of the district
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CO Proceeds used to acquire or construct real property, plant, or equipment.
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Limitations:
o Total unpaid principal cannot exceed 3% of taxable valuation
o Not exceed 20 year term
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CO certificates represent long-term debt with the intent to pay it back utilizing CO levy.
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Complete your 5-year CO plan to ensure that your district has sufficient resources
available to take on a series of long-term debt payments SDCL 13-16-9.2.
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Understand Mill Max regarding the CO levy.
Notes
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13-19-1. School board power to borrow on notes--Authorization, issuance and
sale--Maximum term. Any school board may borrow money, from any source willing to
lend the money, by issuing a promissory note subject to the limitations and regulations
set forth in §§ 13-19-2 to 13-19-6, inclusive. All notes shall be authorized, issued, and
sold in accordance with the provisions of chapter 6-8B, except that no election shall be
held and the notes may not be issued for a term in excess of twenty-four consecutive
months.
13-19-2. Amount borrowed on notes limited by anticipated receipts. Except for
obligations to the state, including the health and educational facilities authority, or federal

government, the money borrowed pursuant to § 13-19-1 may not exceed the sum of
ninety-five percent of the amount of taxes levied or proposed to be levied by the school
board but not collected at the date of borrowing by the school board pursuant to § 13-112 for the current or next full school fiscal year for the fund for which the money is
borrowed plus other anticipated receipts for the fund which have not been collected at
the date of borrowing.
13-19-3. Borrowing limit reduced by outstanding warrants or notes. In case any
registered warrants or promissory notes are outstanding against the fund for which the
money is to be borrowed, the borrowing limit as specified in § 13-19-2 shall be reduced
by the amount of such warrants or promissory notes outstanding at the time the money
is borrowed.
Lease Financings
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13-16-6. Definition and use of capital outlay fund--Levy required. The capital outlay
fund of the school district is a fund provided by law to meet expenditures which result in
the acquisition or lease of or additions to real property, plant, or equipment. Such an
expenditure shall be for land, existing facilities, improvement of grounds, construction of
facilities, additions to facilities, remodeling of facilities, or for the purchase or lease of
equipment. It may also be used for installment or lease-purchase payments for the
purchase of real property, plant, or equipment, which have a contracted terminal date
not exceeding twenty years from the date of the installment contract or lease-purchase
and for the payment of the principal of and interest on capital outlay certificates issued
pursuant to § 13-16-6.2. Any purchase of one thousand dollars or less may be paid out
of the general fund. The total accumulated unpaid principal balances of such installment
contracts and lease-purchase and the outstanding principal amounts of such capital
outlay certificates may not exceed three percent of the taxable valuation. The school
district shall provide a sufficient levy each year under the provisions of § 13-16-7 to meet
the annual installment contract, lease-purchase, and capital outlay certificate payments,
including interest.
13-16-6.1. Bidders on installment purchases or lease-purchase agreement to state
interest rate and installment schedule. Notwithstanding the provisions of chapters 518A and 13-20, if any proposed installment purchase contract or lease-purchase
agreement authorized under chapter 13-16, is to be entered into by a school district, the
notice for bidders shall require the bidders to state the rate of interest and the installment
payment or lease-purchase schedule that would have to be made by the school district
in fulfillment of the contract. However, the requirement of this section does not apply to
any installment purchase or lease-purchase to be entered into between a school district
and the health and educational facilities authority.
13-16-6.3. Hearing on installment purchase, lease-purchase or capital outlay
certificates--Approval or reference to voters. Any proposed installment purchase
contract, lease-purchase, or issue of capital outlay certificates authorized pursuant to §
13-16-6 or 13-16-6.2 which will obligate the school district for future payments on the
principal, the total of which will exceed one and one-half percent of the taxable valuation
of taxable property within the district, may not be entered into, or certificates issued,
unless prior thereto the school board conducts a public hearing thereon after having
given notice by publication at least twice in its official newspaper at least ten days
before the hearing. Upon the hearing the board may approve the action or may
refer the matter to the voters of the district
REMINDER:

13-16-9.3. Public hearing for use of capital outlay fund--Notice
Any school district using the capital outlay fund for payment of construction of
new facilities or construction of additions to facilities, the total of which requires
advertising for bids under chapter 5-18A, shall have a public hearing at least ten
days prior to the advertisement of any contract specifications. The public hearing
shall be advertised in the legal newspaper of the school district. Following the
public hearing, and approval of the school board, the school district may use the
capital outlay fund as provided in > § 13-16-6. No school district may change the
originally advertised use of the fund without holding another public hearing.
WHICH FUND DO I USE—CAPITAL OUTLAY FUND OR CAPITAL PROJECTS
FUND?
20 SPECIAL REVENUE FUNDS—Governmental Fund type used to account for the proceeds of
specific revenue sources that are restricted or committed to expenditure for specified purposes
other than debt service or capital projects and exclusive of resources held in trust for individuals,
private organizations, or other governments (GASB 54). Inherent in this description are two
criteria that must be met before a special revenue fund may be used:

“Expenditure for specific purposes.” Special revenue funds are designed to help
determine and demonstrate that resources that must be used for a specified purpose
are, in fact, used for that purpose. Such limitation on spending may be imposed by
external parties (creditors, grantors, contributors, other governments), by constitutional
provisions, by enabling legislation, or by action taken by the government’s highest level
of decision-making authority.

“Proceeds of specific revenue sources.” A limitation on how resources may be spent is
not enough, by itself, to justify the use of a special revenue fund. At the core of each
special revenue fund must be resources derived from one or more specific revenue
source; therefore a school board’s decision to commit a portion of such a surplus to a
specific project would not be sufficient to justify the use of a special revenue fund.
Conversely, a special revenue fund would be appropriate for a specific tax revenue
restricted for spending on project. Once a special revenue fund has been properly
established, other resources that become available for the same purpose may be
reported there as well, provided that inflows from the core revenue sources are expected
to remain a substantial portion of the fund’s total inflows.
Frequently the use of a special revenue fund is legally required. Otherwise, the use of the
special revenue fund is permitted rather than mandated for financial reporting purposes.
21 Capital Outlay Fund - a special revenue fund established by SDCL 13-16-6 to meet
expenditures which result in the acquisition of or additions to real property, plant or equipment.
13-16-6. Definition and use of capital outlay fund--Levy required. The capital outlay fund of
the school district is a fund provided by law to meet expenditures which result in the acquisition
or lease of or additions to real property, plant, or equipment. Such an expenditure shall be for
land, existing facilities, improvement of grounds, construction of facilities, additions to facilities,
remodeling of facilities, or for the purchase or lease of equipment. It may also be used for
installment or lease-purchase payments for the purchase of real property, plant, or equipment,
which have a contracted terminal date not exceeding twenty years from the date of the
installment contract or lease-purchase and for the payment of the principal of and interest on
capital outlay certificates issued pursuant to § 13-16-6.2.
Any purchase of one thousand dollars or less may be paid out of the general fund. The total
accumulated unpaid principal balances of such installment contracts and lease-purchase and
the outstanding principal amounts of such capital outlay certificates may not exceed three
percent of the taxable valuation. The school district shall provide a sufficient levy each year
under the provisions of § 13-16-7 to meet the annual installment contract, lease-purchase, and
capital outlay certificate payments, including interest.
A school district which contracts its student transportation may expend from the capital outlay
fund an amount not to exceed fifteen percent of the contract amount. In addition, a school
district which reimburses for mileage instead of providing transportation pursuant to § 13-30-3,
may use the capital outlay fund to pay for fifteen percent of its mileage reimbursement costs.
The capital outlay fund may be used to purchase textbooks and instructional software.
The capital outlay fund may be used to purchase warranties on capital assets if the warranties
do not include supplies.
During the period of time beginning on July 1, 2009, and ending on June 30, 2018, any school
district may make payments from its capital outlay fund for the purchase of property insurance
and casualty insurance, for payments for energy costs and the cost of utilities, and for motor fuel
or for any portion of a contract providing transportation to students or for any mileage
reimbursements. However, the total amount that a school district expends from its capital outlay
fund for these expenses may not exceed forty-five percent of the total tax revenues deposited in
that fund during the current school fiscal year, and for any school district with a current tax levy
for the capital outlay fund that is greater than its tax levy for the capital outlay fund in school
fiscal year 2008, the total amount expended from the capital outlay fund for these expenses
may not exceed forty-five percent of the total tax revenues that would have been deposited in
that fund during the current school fiscal year if the tax levy for the capital outlay fund had not
been increased since 2008.
40 CAPITAL PROJECTS FUNDS—Fund type used to account for financial resources that are
restricted, committed, or assigned to expenditure for capital outlays including the acquisition or
construction of capital facilities and other capital assets (excluding capital-related outflows
financed by proprietary funds (food service) or for assets that will be held in trust for individuals,
private organizations, or other governments). (GASB 54)
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Governments tend to distinguish their operating activities from their capital activities, just
as they tend to distinguish their operating budgets from their capital budget.
Accordingly, GAAP provided capital projects funds “to account for and report financial
resources that are restricted, committed, or assigned to expenditure for capital outlays
including the acquisition or construction of capital facilities and other capital assets.
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One important reason governments wish to distinguish capital outlays from operating
outlays is to avoid distorting operating trend data (“spikes” in operating expenditures
during peak periods of major construction). The acquisition of many capital assets
however is more or less routine from one period to the next (new vehicles for the motor
pool). Typically a capital projects fund is not used for such routine capital outlays, which
is reported instead by function in the capital outlay special revenue fund. Rather, capital
projects funds tend to be used primarily for major projects and acquisitions (construction
of a new school building) and for capital acquisition or construction financed with
borrowed or contributed resources (and thus of special interest to the resource provider).
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Capital projects funds can be a valuable management tool for multi-year projects or for
projects financed by multiple resources.
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The use of a capital projects fund frequently is required by debt covenants, grant
contracts, law, or regulation. Otherwise the use of the capital projects fund type is
permitted rather than mandated for financial reporting purposes.
41 Capital Projects Fund #1—Use separate number for each capital projects fund.
HOW DO I ACCOUNT FOR IT?
Basic Accounting for Bonds (Certificates):
When governments issue bonds, there normally is a brief period between the issuance of debt
instruments (closing date) and receipt of the proceeds (settlement date). For accounting and
reporting purposes, the issuance of debt is reported as of the closing date. The appropriate
accounting and financial reporting for debt depends on the measurement focus used to prepare
a given set of financial statements.
Financial statements prepared using the economic resources measurement focus (Governmentwide financial statements and Proprietary fund financial statements), governments record the
issuance of debt much like their private-sector counterparts, except that issuance costs (other
than prepaid insurance) are treated as an expense rather than deferred and amortized.
Assume, for instance, the following circumstances:
Face amount of debt:
$ 1,000
Original issue discount:
60
Underwriter’s discount: (withheld from proceeds): 40
The appropriate journal entry would be as follows:
101
Cash
5000-614
Debt Service Expense—Issuance Cost
193
Unamortized Discounts on Bonds Sold
501
Bonds Payable
(To record the issuance of bonds)
DR
$900
40
60
CR
$1,000
Note that three permanent accounts (accounts that appear in the statement of financial position)
are immediately affected by the issuance of debt.
In contrast, under the current financial resources measurement focus (governmental fund
financial statements), cash is the only permanent account affected by the issuance of debt.
That is the other permanent accounts (bonds payable and original issue discount) are replaced
by corresponding temporary accounts (accounts that appear in the statement of resource
flows—statement of revenues, expenditures, and changes in fund balances), as follows:
DR
101
Cash
$900
5000-614
Debt Service Expense—Issuance Cost
40
8150-617
Other Financing Uses—Discount on Bonds Issued
60
5121
Other Financing Sources-GO Bonds Issued
(To record the issuance of bonds)
CR
$1,000
If debt is issued at a premium, rather than a discount, the premium is reported as a separate
other financing source. Assume for example, that the debt is the previous example was issued
at a $60 premium rather than a $60 discount. In that case, the appropriate journal entry would
be as follows:
DR
101
Cash
$1,020
5000-614
Debt Service Expense—Issuance Cost
40
5121
Other Financing Sources-GO Bonds Issued
5123
Other Financing Sources-Premiums on Bonds Issued
(To record the issuance of bonds)
CR
$1,000
60
Basic Accounting for Leases:
Lease-purchase agreements may be in the form of capital or operating leases. A capital lease
is, for the most part, viewed as an installment purchase of property rather than the rental of
property. An operating lease does not involve the purchase of property and payments represent
the rental expenditures. Capital leases exist if ANY of the following conditions are met.
(a)
The lease transfers ownership of the property to the lessee
by the end of the lease term.
(b)
The lease contains a bargain purchase option.
(c)
The lease term is equal to 75% or more of the estimated
economic life of the leased property.
(d)
The sum of the principal lease payments equal 90% of the
fair value of the asset.
Once it has been determined that a capital lease exists, then the following entries would be
required for those capital leases that exceed the capitalization policy:
1.
Equipment (Account No. 90 204)
Net Assets Invested in Capital (90 706)
xx
xx
To capitalize the present value of the minimum lease payments in the
General Capital Asset Accounts.
2.
Expenditure- (Applicable Department)
Other Financing Source (Account 5124)
Cash - Down payment if applicable
xx
xx
xx
At the start of the lease, the present value of the minimum lease payments must be recognized
as an expenditure against the budget and as an other financing source. The expenditure
category used should relate to the type of asset acquired. (typically recorded in the CO Fund)
3.
Net Assets Invested in Capital (00 706)
xx
Other Long-Term Debt
(Account No. 00 509)
xx
This entry is necessary to recognize the liability in the General Long-Term Liability Accounts.
The amount capitalized should be the present value of the minimum lease payments.
4.
Expenditure
Cash
xx
xx
To record the periodic payments in future periods. The expenditure account to recognize these
payments to service the debt should be account "5000 Debt Services”, more than likely from the
CO Fund.
If the lease is an operating lease, the lease would be recorded as follows:
Expenditures - Rent
Cash (Vouchers Payable)
xx
xx
To record the operating lease at the inception of the lease. This would be coded to the
respective function that correlates to the type of item purchased.
The preceding reflects the standard approach in accounting for leases. There are many
different types of leases out there, so consideration should be given for unique applications that
may apply. GASB 62 , para 213
GENERAL LONG-TERM LIABILITIES
Fund 00 serves the purpose of keeping track of how much each district owes. It is only used to
keep track of governmental debt…….which is almost the only type of debt a school district has.
Districts should periodically update Fund 00 so that it will have the proper balances at yearend.
Proper statement of net assets accounts such as Net Assets Invested in Capital (706) and Net
Assets Unrestricted (708) should be used. To identify with the proper offset account, each
liability should be assessed as to whether it is “capital” related or not. A sample trial balance of
fund 00 is as follows:
706 Net Assets Invested in Capital
708 Net Assets Unrestricted
2,330,000
130,000
501 Bonds Payable
1,000,000
50201 CO Certificate Payable – H.S.
500,000
50202 CO Certificate Payable – Elementary
800,000
504 Compensated Absences
50,000
505 Early Retirement Benefits Payable
60,000
506 Net OPEB Obligation
20,000
509 Other Long-term Debt Payable (capital leases)
30,000