General and Proprietary Long-Term Liabilities
State and local governments report long-term liabilities in the government-wide financial statements under the economic resources measurement focus and accrual basis of accounting. These liabilities fall into two categories — general long-term liabilities (related to governmental activities) and proprietary long-term liabilities (related to business-type activities) — each with distinct reporting requirements at the fund level versus the government-wide level.
This section maps to BAR Area III, Group C, Topic 4 – General and Proprietary Long-Term Liabilities. Representative tasks:
- Identify general and proprietary long-term liabilities reported in the government-wide financial statements of state and local governments.
- Recall the recognition and measurement requirements for a net pension liability for a defined benefit pension plan for state and local governments.
- Recall the recognition and measurement requirements for a net other post employment benefit (OPEB) liability for an OPEB plan for state and local governments.
- Calculate the total indebtedness to be reported in the government-wide financial statements of a state or local government.
- Calculate the net general long-term debt balance for state and local governments and prepare journal entries (e.g., debt issuance, interest payments, issue premiums, issue discounts).
General vs. Proprietary Long-Term Liabilities
| General Long-Term Liabilities | Proprietary Long-Term Liabilities | |
|---|---|---|
| Related to | Governmental activities | Business-type activities |
| Backed by | Full faith and credit (taxing power) | Revenue from enterprise operations |
| Reported in government-wide? | Yes | Yes |
| Reported in fund statements? | No — not in governmental fund balance sheet | Yes — in proprietary fund Statement of Net Position |
| Examples | GO bonds, compensated absences, net pension liability, net OPEB liability, claims & judgments | Revenue bonds, capital leases of enterprise funds |
General long-term liabilities are never reported in governmental fund financial statements. They appear only in the government-wide Statement of Net Position under governmental activities. This is because governmental funds use the current financial resources measurement focus — long-term obligations are not "current."
Where Long-Term Liabilities Are Reported
| Reporting Level | General LT Liabilities | Proprietary LT Liabilities |
|---|---|---|
| Government-wide Statement of Net Position | ✓ Reported | ✓ Reported |
| Governmental fund balance sheet | ✗ Not reported | N/A |
| Proprietary fund Statement of Net Position | N/A | ✓ Reported |
| Notes to financial statements | ✓ Disclosed | ✓ Disclosed |
Types of Governmental Debt
| Debt Type | Description | Security/Backing |
|---|---|---|
| General obligation (GO) bonds | Backed by full faith, credit, and taxing power | Property taxes / general revenues |
| Revenue bonds | Repaid from specific revenue stream | User fees, tolls, utility charges |
| Special assessment bonds | Repaid from assessments on benefited properties | Special assessments levied on property owners |
| Tax anticipation notes (TANs) | Short-term borrowing against expected tax revenue | Anticipated tax collections |
| Bond anticipation notes (BANs) | Short-term borrowing pending long-term bond issuance | Proceeds of future bond issue |
| Lease liabilities (GASB 87) | Present value of future lease payments | Lease contract |
| Compensated absences | Accrued vacation/sick leave owed to employees | General revenues |
| Claims and judgments | Litigation settlements, self-insurance claims | General revenues |
| Landfill closure/postclosure care | Estimated future costs of closing a landfill | General revenues or enterprise fees |
| Net pension liability (GASB 68) | Unfunded portion of pension obligation | General revenues |
| Net OPEB liability (GASB 75) | Unfunded portion of OPEB obligation | General revenues |
GO bonds are the most common general long-term liability tested. Remember: GO bonds are backed by taxing power, while revenue bonds are backed by a specific revenue source (e.g., water/sewer fees). Revenue bonds are typically proprietary long-term liabilities.
Bond Issuance Journal Entries — Government-Wide Level
At the government-wide level, bonds are recorded as long-term liabilities under full accrual accounting.
Issuance at Par
Bear City issues $5,000,000 of general obligation bonds at par (face value) on January 1:
Issuance at a Premium
Bear City issues $5,000,000 face value bonds at 102 (i.e., for $5,100,000):
Issuance at a Discount
Bear City issues $5,000,000 face value bonds at 98 (i.e., for $4,900,000):
Interest Payment
Bear City pays semiannual interest on its $5,000,000, 6% GO bonds (coupon = $150,000):
Premium Amortization (Straight-Line)
Amortize $100,000 premium over 20 semiannual periods ($5,000 per period):
Net interest expense for the period = $150,000 − $5,000 = $145,000.
Discount Amortization (Straight-Line)
Amortize $100,000 discount over 20 semiannual periods ($5,000 per period):
Net interest expense for the period = $150,000 + $5,000 = $155,000.
Fund-Level Treatment — Governmental Funds
At the governmental fund level, long-term debt is not recorded as a liability. Instead:
| Transaction | Governmental Fund Entry | Government-Wide Entry |
|---|---|---|
| Bond proceeds received | Other Financing Sources — Bond Proceeds | Bonds Payable (liability) |
| Principal payment | Expenditures — Debt Service (Principal) | Reduce Bonds Payable |
| Interest payment | Expenditures — Debt Service (Interest) | Interest Expense |
| Premium received | Other Financing Sources — Premium on Bonds | Premium on Bonds Payable (liability) |
Example — Governmental Fund Entries for Bond Issuance at Premium
Bear City's General Fund records the same $5,100,000 bond issuance:
Example — Debt Service Payment (Governmental Fund)
Bear City's Debt Service Fund pays $250,000 principal and $150,000 interest:
At the governmental fund level, no long-term liability is ever recorded. Bond proceeds are "Other Financing Sources" and principal repayments are "Expenditures." At the government-wide level, the liability is established at issuance and reduced with each principal payment.
Net Pension Liability — GASB 68
GASB Statement No. 68 requires state and local governments to report a net pension liability (NPL) on the government-wide Statement of Net Position for defined benefit pension plans.
Formula
| Component | Description |
|---|---|
| Total Pension Liability (TPL) | Present value of projected benefit payments attributable to past service (actuarial accrued liability) |
| Plan Fiduciary Net Position | Fair value of plan assets available to pay benefits |
| Net Pension Liability | The unfunded portion — what the government owes |
Measurement Approach
| Element | Requirement |
|---|---|
| Actuarial cost method | Entry age normal |
| Discount rate | Blended rate — long-term expected rate of return on plan investments (to extent plan assets are projected to cover benefit payments), otherwise a municipal bond index rate |
| Attribution | Projected benefit payments attributed to periods of service using entry age normal |
Pension Expense Components
Amortized items include:
- Changes in assumptions
- Differences between expected and actual experience
- Differences between projected and actual earnings on plan assets
Deferred Outflows and Inflows Related to Pensions
| Deferred Outflows (increase NPL expense over time) | Deferred Inflows (decrease NPL expense over time) |
|---|---|
| Net difference when actual earnings < projected | Net difference when actual earnings > projected |
| Changes in assumptions that increase TPL | Changes in assumptions that decrease TPL |
| Actual experience > expected (losses) | Actual experience < expected (gains) |
| Employer contributions after measurement date | — |
Contributions made after the measurement date are always reported as a deferred outflow of resources — not a reduction of the net pension liability — until the next measurement date.
Net OPEB Liability — GASB 75
GASB Statement No. 75 mirrors GASB 68 for other postemployment benefits (OPEB) — benefits other than pensions provided to retired employees.
What Qualifies as OPEB?
- Healthcare (medical, dental, vision)
- Life insurance
- Disability benefits
- Long-term care
Formula
Key Parallels to Pensions (GASB 68 vs. GASB 75)
| Element | GASB 68 (Pensions) | GASB 75 (OPEB) |
|---|---|---|
| Liability | Net Pension Liability | Net OPEB Liability |
| Actuarial cost method | Entry age normal | Entry age normal |
| Discount rate | Blended rate | Blended rate |
| Deferred outflows/inflows | Yes | Yes |
| Expense recognition | Service cost + interest ± amortizations | Service cost + interest ± amortizations |
| Measurement frequency | At least biennially | At least biennially |
The primary conceptual difference is the benefit type — pensions provide retirement income, while OPEB provides other benefits (mainly healthcare). The accounting framework is virtually identical.
Compensated Absences
Governments must accrue liabilities for compensated absences (vacation and sick leave) that employees have earned but not yet used.
Recognition Rules
| Leave Type | When to Accrue | Condition |
|---|---|---|
| Vacation leave | When earned | If rights vest or accumulate |
| Sick leave | Portion expected to be paid | Only if terminal payment or vesting policy exists |
Government-Wide vs. Fund-Level
| Level | Treatment |
|---|---|
| Government-wide | Accrue the full liability for compensated absences |
| Governmental funds | Recognize expenditure only for amounts due and payable from currently available resources (typically the current portion) |
| Proprietary funds | Accrue the full liability (same as government-wide) |
Example
Pine County employees have earned $2,400,000 in unused vacation leave. Of this, $600,000 is expected to be liquidated with current available resources.
Government-wide entry:
Governmental fund entry (only the current portion):
Calculating Total Indebtedness
The total indebtedness reported in the government-wide Statement of Net Position includes all long-term liabilities of both governmental and business-type activities.
Example — MAS County Total Indebtedness
| Liability Category | Amount |
|---|---|
| General obligation bonds payable | $45,000,000 |
| Less: Unamortized discount | ($900,000) |
| Revenue bonds payable (enterprise fund) | $18,000,000 |
| Plus: Unamortized premium | $360,000 |
| Capital lease obligations | $4,200,000 |
| Compensated absences | $3,100,000 |
| Claims and judgments | $1,800,000 |
| Net pension liability | $12,500,000 |
| Net OPEB liability | $8,400,000 |
| Landfill closure/postclosure care | $2,600,000 |
| Total indebtedness | $95,060,000 |
When calculating total indebtedness, remember to subtract unamortized discounts and add unamortized premiums to the face value of bonds. The carrying value (net of premium/discount) is what appears on the Statement of Net Position.
Complete Worked Example — Bond Issuance and Debt Service
Bear City issues $10,000,000 of 5%, 10-year general obligation serial bonds on July 1, Year 1, at 103 (total proceeds = $10,300,000). Interest is paid semiannually on January 1 and July 1. The $300,000 premium is amortized straight-line over 20 semiannual periods ($15,000 per period). The first principal payment of $1,000,000 is due July 1, Year 2.
Government-Wide Entries (Full Accrual)
July 1, Year 1 — Bond Issuance:
December 31, Year 1 — Accrue Interest at Year-End:
Semiannual coupon = $10,000,000 × 5% × ½ = $250,000. Premium amortization = $15,000.
January 1, Year 2 — Interest Payment:
July 1, Year 2 — Interest Payment + Premium Amortization:
July 1, Year 2 — Principal Payment:
Governmental Fund Entries (Modified Accrual)
July 1, Year 1 — Bond Issuance (Capital Projects Fund):
January 1, Year 2 — Interest Payment (Debt Service Fund):
July 1, Year 2 — Interest + Principal Payment (Debt Service Fund):
When preparing the reconciliation from governmental fund statements to government-wide statements, you must adjust for:
- Bond proceeds reported as Other Financing Sources (remove and add liability)
- Principal payments reported as expenditures (remove expenditure, reduce liability)
- Premium/discount amortization differences
- Accrued interest payable at year-end
Summary of Key Concepts
| Concept | Key Rule |
|---|---|
| General long-term liabilities | Reported only in government-wide statements — never in governmental funds |
| Proprietary long-term liabilities | Reported in both proprietary fund and government-wide statements |
| Bond proceeds (governmental fund) | Recorded as Other Financing Sources |
| Bond proceeds (government-wide) | Recorded as a liability |
| Net Pension Liability | TPL − Plan Fiduciary Net Position |
| Net OPEB Liability | Total OPEB Liability − Plan Fiduciary Net Position |
| Compensated absences (government-wide) | Full liability accrued |
| Compensated absences (governmental fund) | Only current portion recognized |
| Premium on bonds | Added to carrying value; amortized to reduce interest expense |
| Discount on bonds | Subtracted from carrying value; amortized to increase interest expense |