Question

Citizens within a defined geographic area of Dolan City created a special assessment district to facilitate the construction of sidewalks. The city was responsible for overseeing the entire construction project. The city issued bonds in its own name to pay the contractor for the construction. However, the city was not responsible in any manner for the bonds. The bonds were secured by the special assessments that are levied against properties within the special assessment district. Collections of special assessments would be recorded in which of the following funds of Dolan City?

a. Special assessment fund.
b. Agency fund.
c. Special revenue fund.
d. Debt service fund.

Answer 1

Collections of special assessments in Dolan City for the construction project would be recorded in an agency fund, as the city is acting as an agent for bondholders, ensuring that the assessments go to pay for the construction bonds.

Step-by-step explanation:

In municipal governments of the U.S., when a special assessment is levied specifically for a local benefit like constructing sidewalks in a special assessment district, the funds collected are recorded in an agency fund. This is because the city acts as an agent collecting the assessments on behalf of the bondholders. The city is not responsible for the bonds but ensures the collection and payment of assessments to bondholders. The agency fund is used in such cases because it handles resources that the government is holding in a custodial capacity rather than as part of its own revenue system.

The name 'agency fund' lends itself to this type of financial arrangement, where the municipality is overseeing the process in an agency capacity, ensuring that the funds collected go directly to pay for the bonds issued for the specific project. This is different from a debt service fund, which is used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest, and a special revenue fund, which is used to account for proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.