SUBSECTION 2.2.5.2
LONG-TERM OBLIGATIONS

2.2.5.2.1

General

Effective Date:

Sept. 1, 1998

Depending on the nature of the obligation, long-term obligations of the state are accounted for in one of two ways. Long-term obligations related to, and expected to be paid from, proprietary and similar trust fund type accounts are accounted for in those accounts (fund long-term obligations). All other long-term obligations are accounted for in an account group (general long-term obligations.) Section 7.2.3.2 of this manual describes the various long-term obligation general ledger codes.

2.2.5.2.1.a

Fund Long-Term Obligations--Fund long-term obligations are directly related to and payable from proprietary and similar trust fund type accounts. They generally are not expected to be paid within the next twelve months. Fund long-term obligations may be backed by a lien on a specific fund asset or by the full faith and credit of the state.

2.2.5.2.1.b

General Long-Term Obligations--All long-term indebtedness of the state which is not classified as a fund obligation should be accounted for as a general long-term obligation. General long-term obligations are liabilities that will be not be paid by expending available resources as of the end of the current fiscal year. General long-term obligations are secured by the general credit and revenue raising capacity of the state.

2.2.5.2.2

Bonds Payable

Effective Date:

Sept. 1, 1998

2.2.5.2.2.a

Amounts owed from the issuance of long-term debt instruments under a formal legal procedure and secured either by the pledge of specific properties or revenues or by the general credit of the state are recorded as Bonds Payable. Bond issues for the state of Washington are classified as follows:

• General Obligation Bonds - Statewide bond issues that are secured by an unconditional pledge of the full faith and credit and taxing power of the state.

• Zero-Interest Rate General Obligation Bonds - These bonds are also secured by an unconditional pledge of the full faith and credit and taxing power of the state. The only difference between these and the general obligation bonds is the way investors earn a rate of return. Zero-interest rate bonds pay no annual debt service. Interest is accreted each year until the bonds mature.

• Limited Obligation Bonds - These bonds, while backed by the full faith and credit of the state, are payable primarily from dedicated revenues of the state's motor vehicle fuel excise tax and other miscellaneous dedicated revenues.

• Revenue Bonds - These bond issues are secured by income derived from assets acquired or constructed with the bond proceeds.

• Refunding Bonds - When advantageous and permitted by statute and bond covenants, the State Finance Committee can authorize the advance refunding of outstanding bonds. Refunding bonds are issued to retire bonds already outstanding.

2.2.5.2.2.b

When issued, the bonds discussed above specify principal repayments as:

• Term Bonds - Bonds for which the entire principal matures on one date.

• Serial Bonds - Bonds for which the principal is repaid in periodic installments over the life of the issue.

2.2.5.2.2.c

Bond Accounting--Bonds are accounted for in one of two ways depending on whether they are classified as fund obligations or general long-term obligations.

2.2.5.2.2.c(1)

Fund bonded debt--Bond obligations related to and intended to be paid from proprietary and similar trust fund type accounts are recorded in such accounts. (Refer to Section 2.2.5.5.5 of this manual for illustrative entries for issuance and servicing of fund bonded debt.)

2.2.5.2.2.c(2)

General bonded debt--When bonds are issued that are not fund obligations, the liability is recorded in Account 999 "General Long-Term Obligations Account Group" for the principal amount of the debt. The proceeds from the issuance of the bonds are recorded in the appropriate account (generally special revenue or capital projects fund type) for expenditure on the authorized capital outlay. The debt service activity, redeeming the bond and/or making interest payments, is recorded in a debt service fund type account. (Refer to Section 2.2.5.5.6 of this manual for illustrative entries for issuance and servicing of general obligation bonded debt.)

2.2.5.2.2.d

Refunding Bonds--When advantageous and permitted by statute or bond covenants, the state advance refunds outstanding bonds. Advance refunding occurs when new debt is issued to provide resources to satisfy the debt service requirements of an outstanding bond issue. The net proceeds of the refunding issue are used to purchase U.S. Government securities which are placed in irrevocable trusts with escrow agents to provide for all future debt service payments on the refunded bonds. The refunded bonds are considered to be defeased. Neither the liability for the refunded bonds nor the securities held in the irrevocable trusts are reflected in the state’s financial accounting records.

General bonded debt is refunded using a debt service fund type account. The refunding proceeds are recorded with Revenue Source Code 0759 "Proceeds of Refunding Bonds" and the delivery of the proceeds to the escrow agent is recorded with Revenue Source Code 0755 "Payments to Refunded Bond Escrow Agents." The refunded debt is removed from and the refunding debt is recorded in Account 999 "General Long-Term Obligations Account Group."

When bonded debt of a proprietary or similar trust fund type account is refunded, the refunded debt is removed from, and the refunding debt is recorded in the applicable account. The difference between the cost of refunding the old bonds (the outstanding principal of the old debt plus any associated costs) and the proceeds of the refunding bonds is deferred and amortized over the remaining life of the old debt or the life of the refunding debt, whichever is shorter.

2.2.5.2.3

Lease-Purchase Agreements Payable

Effective Date:

Sept. 1, 1998

2.2.5.2.3.a

A lease may be classified as an operating lease or a capital lease. An operating lease is defined as a rental of an asset over a term of more than one year. A capital lease is a lease that transfers substantially all the benefits and risks inherent in the ownership of the property to the state. A capital lease must meet one or more of the following criteria:

• By the end of the lease term, ownership of the leased property is transferred to the state.

• The lease contains a bargain purchase option.

• The lease term is equal to 75 percent or more of the estimated useful life of the leased property.

• The lease qualifies as a capital lease if, at the inception of the lease, the present value of the minimum lease payments, excluding executory costs (usually insurance, maintenance, and taxes paid in connection with the leased property, including any profit thereof) is 90 percent or more of the fair value of the leased property.

It is the state’s policy to record capital lease obligations only for those capital leases where the net present value of the future minimum lease payments is $10,000 or more. Capital lease obligations which fall below the $10,000 limit are treated like operating leases.

State lease agreements typically contain a fiscal funding clause, or cancellation clause, which permits the state to terminate the agreement on a biennial basis if funds are not appropriated to continue the next biennium's lease payments. Generally, the likelihood of cancellation is remote. Leases which contain a cancellation clause must be evaluated to determine if the possibility of cancellation is remote, and if so, and if they also meet at least one of the criteria of a capital lease, then the leases should be classified as capital leases.

2.2.5.2.3.b

Lease Accounting

2.2.5.2.3.b(1)

Operating Lease - Accounting for an operating lease consists of recording rental payments as a normal operating expenditure/expense (Sub-object ED) on a periodic basis.

2.2.5.2.3.b(2)

Capital Lease - Accounting for a capital lease consists of:

• recording the capital lease at its inception,

• updating the Fixed Asset Inventory System,

• separating periodic payments into principal and interest portions, and

• applying payments to the correct object of expenditure.

When a capital lease represents the acquisition or construction of a general fixed asset, the acquisition or construction of the general fixed is reflected as an expenditure with GL Code 6514 "Fixed Asset Acquisitions by Lease/Installment Purchase" with the lease proceeds recorded with GL Code 3221 "Non-cash Other Financing Sources" consistent with the provisions of NCGA Statement 5. The fixed asset acquired is recorded in Account 997 "General Fixed Assets Account Group" and the lease obligation is recorded in Account 999 "General Long-Term Obligations Account Group." (Refer to Section 2.2.4.6.7.)

Periodic lease payments represent debt service expenditures in governmental and expendable trust fund type accounts. Sub-object PA is charged for the annual amount paid that is applicable to the principal portion of the lease-liability and Sub-object PB is charged for the interest portion of the payment. The lease liability recorded in the General Long-Term Obligations Account Group is reduced by the amount of principal payments.

Periodic payments also represent a combination of debt service and a reduction of a liability in proprietary, non-expendable trust, and pension trust fund type accounts. GL Code 5172 "Lease-Purchase Agreements Payable - Short-Term" is debited for the amount paid that is applicable to the principal portion of the lease-purchase liability and Sub-object PB is debited for the interest portion of the payment.

Normally the monthly billing will separate the interest portion from principal, but if not separately stated, interest must be computed by the agency using the current market interest rate the lessee would be charged at the inception of the lease to borrow the funds necessary to purchase the asset.

Payment is normally made from an operating account unless specific requirements dictate use of a debt service fund type account. Refer to Section 2.2.5.5.7 for illustrative entries.

2.2.5.2.4

Certificates of Participation

Effective Date:

Sept. 1, 1998

2.2.5.2.4.a

In order to increase the efficiency and cost effectiveness of lease-purchase activity, the State established a master lease purchase program administered through the Office of the State Treasurer (OST). This program uses certificates of participation (COPs) as a financing mechanism. There are two types of COPs as follows:

• Equipment/Real Estate Acquisition Program - Under this program, a fixed asset is generally acquired with a single transaction.

• Construction Program - Under this program, an asset is constructed. The construction activity takes place over a period of time and involves multiple transactions. If the construction period is lengthy and debt service on the COP is required during the construction phase, interest costs may require capitalization. Refer to Section 3.2.1.2.1.c.

2.2.5.2.4.b

Generally, COPs are payable from annual appropriations by the Legislature. If the possibility that the Legislature will fail to appropriate repayment is deemed remote, then a liability for the COP is recorded.

2.2.5.2.4.c

When governmental and expendable trust fund type accounts purchase equipment or real estate through COPs, the transaction is recorded as a non-cash expenditure and a non-cash other financing source. The purchase of equipment approved for financing through the COP program is not an allotment charge. The COP liability is recorded in Account 999 "General Long-Term Obligations Account Group." When the asset acquired meets the state’s capitalization policy, it is recorded in Account 997 "General Fixed Assets Account Group."

For acquisition of equipment or real estate through COPs by proprietary and similar trust fund type accounts, the COP liability is recorded in the acquiring accounts. Assets acquired meeting the state’s capitalization policy are also recorded in the acquiring accounts.

Refer to Section 2.2.5.5.8 for illustrative entries for equipment/real estate acquisition through COPs.

2.2.5.2.4.d

For general fixed asset construction financed through COPs (excluding higher education), the proceeds, except for reserves, are to be deposited into and expended out of Account 241 "COP Construction Account." The liability is recorded in the General Long-Term Obligations Account Group and the construction capitalized in Account 997 "General Fixed Assets Account Group." OST accounts for reserves in Account 739 "Capital Lease Program Account." (Refer to Section 2.2.5.5.9 for illustrative entries for construction financed through COPs.)

2.2.5.2.4.e

Periodic payments on COPs represent debt service in governmental and expendable trust fund type accounts. Sub-object PD is charged for the amount paid that is applicable to the principal and Sub-object PE is charged for the interest portion of the payment. Periodic payments represent a combination of debt service and reduction of liability in proprietary and similar trust fund type accounts. GL Code 5173 "Certificates of Participation/Notes Payable - Short-Term" is charged for the amount paid that is applicable to the principal portion of the COPs and Sub-object PE is to be charged for the interest portion of the payment. Payment is normally made from an operating account through Account 739 "Capital Lease Program Account." (Refer to Sections 2.2.5.5.8 and 2.2.5.5.9 for illustrative entries.)

2.2.5.2.5

Annual Leave Payable

Effective Date:

Sept. 1, 1998

2.2.5.2.5.a

A liability accrues as employees accumulate annual leave in that, at termination, employees become entitled to a cash payment for all eligible accumulated annual leave. Additionally, a liability accrues to the state for certain payroll related payments (e.g., the employer's portion of pension benefit and social security and Medicare taxes.) Governmental and expendable trust fund type accounts accumulate this liability in Account 999 "General Long-Term Obligations Account Group." Proprietary and similar trust fund type accounts record annual leave payable as a fund liability.

2.2.5.2.5.b

2.2.5.2.5.b(1)

As a part of the year end closing process, a determination is made of the dollar value of accumulated annual leave due employees on June 30 using current salary levels. One of two methods is to be employed in this computation:

• Determine the accumulated annual leave liability on an employee-by-employee basis by multiplying the hours accumulated by the respective employee's current hourly rate; or

• Multiply the total accumulated vacation leave hours by the average hourly rate of all employees. (This option is to be used only by those agencies not having an automated system capable of making the calculation on an individual employee basis.)

2.2.5.2.5.b(2)

Once the dollar value of the vacation leave due employees is determined the employer portion of associated payroll related payments (i.e., pension and social security and Medicare taxes) is calculated. The sum of the amount payable to employees and the employer share of the related payroll taxes and benefits represents Accrued Annual Leave Payable.

2.2.5.2.5.c

2.2.5.2.5.c(1)

An adjustment, if necessary, is made at the close of the fiscal year to record the net increase or decrease in annual leave liability. Agencies with multiple proprietary accounts or a combination of governmental and proprietary accounts need to allocate the annual leave liability to each proprietary account and a single total for all governmental fund type accounts. This allocation may be estimated when leave records are not maintained by account.

2.2.5.2.5.c(2)

In proprietary and similar trust fund type accounts, an increase in annual leave liability is recorded as a fund liability through a debit to GL Code 6525 "Expense Adjustments/Eliminations (GAAP)" (using appropriation and program codes as appropriate) and a credit to GL Code 5225 "Accrued Annual Leave Payable - Long-Term" or 5125 "Accrued Annual Leave Payable - Short-Term" as deemed appropriate. A decrease in annual leave liability is recorded by a debit to GL Code 5225 or 5125 and a credit to GL Code 6525 with an applicable appropriation and program codes.

An agency would normally record annual leave liability as a long-term liability to GL Code 5225 on the assumption that employees will generally carry accumulated leave balances over to future years. Annual leave payable is to be classified short-term to GL Code 5125 only when special circumstances exist, such as when a significant number of retirements or terminations (resulting in an unusually high annual leave buy-out) are expected in the next year.

2.2.5.2.5.c(3)

For governmental and expendable trust fund type accounts, an increase in annual leave liability is recorded in Account 999 "General Long-Term Obligations Account Group" as a debit to GL Code 1820 "Amount to be Provided for Retirement of Long-Term Obligations" and a credit to GL Code 5225 "Accrued Annual Leave Payable - Long-Term." A decrease in the annual leave liability is recorded as a debit to GL Code 5225 and a credit to GL Code 1820.

2.2.5.2.6

Sick Leave Payable

Effective Date:

Sept. 1, 1998

2.2.5.2.6.a

A liability for sick leave accrues as the benefits are earned to the extent that it is probable that the employer will compensate the employee for the leave conditioned on the employee's retirement. Paid time off for sick leave which is contingent on an illness is not subject to accrual because it is dependent on a future event that is beyond the control of the employer. To the extent that sick leave will be paid upon retirement, agencies are to estimate and record this liability.

The liability for sick leave includes the dollar value of the estimated amount to be paid in cash to employees upon retirement, and the employer portion of the associated payroll related payments (i.e., social security and Medicare taxes.) Pension is not paid on sick leave buy-out.

2.2.5.2.6.b

2.2.5.2.6.b(1)

The dollar value of sick leave that will be paid to employees upon retirement is calculated using current salary levels and an estimate of the likelihood that employees with accumulated sick leave balances, as of year end, will remain in state service until they are eligible for retirement at which time they will be able to cash out their sick leave. One of the following two methods is to be used in this computation. Once a method is selected, it is to be applied consistently.

2.2.5.2.6.b(1)(a)

Method 1. This method employs an actuarially determined factor of the probability that current employees will remain in state service until they are eligible for retirement. This method is an option where the dollar value of sick leave is readily available or can be calculated by multiplying the total sick leave hours accumulated by the average hourly pay rate of the employees.

The dollar value of sick leave accumulated as of year end is divided by 4 (since the state's buy-out policy is one day for every four accumulated) and then multiplied by the actuarially determined factor representing the probability that leave will be cashed out. This factor will be available annually from OFM Accounting and Administrative Services Division.

2.2.5.2.6.b(1)(b)

Method 2. This method is based on the assumption that future sick leave buy-out will be consistent with recent years, that the average employee who will eventually cash-out sick leave will work 30 years, and that there is a bell-shaped distribution of the employee population such that the mean time to retirement is 15 years. This method would be an option where the dollar value of accumulated sick leave hours is not readily available.

Compute an average of the sick leave buy-out (Sub-object AS) for the most recent 3 years. Multiply the average by 15 years.

2.2.5.2.6.b(2)

Multiply the estimated sick leave that will be paid to by the employer's share of social security and Medicare taxes. The sum of the amount to be paid to employees and the employer payroll taxes represents Accrued Sick Leave Payable.

2.2.5.2.6.c

2.2.5.2.6.c(1)

Once the estimate of sick leave payable as of year end has been calculated, it is compared with the current balance in GL Codes 5127 "Accrued Sick Leave Payable - Short-Term" and 5227 "Accrued Sick Leave Payable - Long-Term." Variance noted, if any, is to be adjusted. Agencies with multiple proprietary accounts or a combination of governmental and proprietary accounts need to allocate the sick leave liability to each proprietary account and a single total for all governmental accounts. This allocation may be estimated when leave records are not kept by account.

2.2.5.2.6.c(2)

In proprietary and similar trust fund type accounts, an increase in sick leave payable is recorded as a fund liability through a debit to GL Code 6525 "Expense Adjustments/Eliminations (GAAP)" (using appropriate appropriation and program codes) and a credit to GL Code 5127 "Accrued Sick Leave Payable - Short Term" and/or GL Code 5227 "Accrued Sick Leave Payable - Long-Term" as appropriate. A decrease would be recorded as a debit to GL Codes 5127 and/or 5227 with an offsetting credit to GL Code 6525 with applicable appropriation and program codes.

Since the liability for sick leave will be cashed out over an extended future time period, it is generally classified as long-term. An exception would be when an agency anticipates significant employee retirements in the next year. In this case, a representative short-term portion is recorded.

2.2.5.2.6.c(3)

For governmental and expendable trust fund type accounts, an increase in sick leave liability is recorded in Account 999 "General Long-Term Obligations Account Group" as a debit to GL Code 1820 "Amount to be Provided for Retirement of Long-Term Obligations" and a credit to GL Code 5227 "Accrued Sick Leave Payable - Long-Term." A decrease in the sick leave liability is recorded as a debit to GL Code 5227 and a credit to GL Code 1820.