A city established a public housing authority to fund the construction of low-income residential homes within city limits. The authority is governed by a nine-person board of trustees. New trustees are nominated by the board itself, but are formally appointed by the city council. However, the city council has never rejected a board nominee.
The trustees have complete responsibility for the day-today operations of the authority, but are required to obtain city council endorsement of the authority's annual budget and must submit audited annual financial statements to the council. The authority is permitted to issue its own debt, which is guaranteed by the federal government. Approximately 90 percent of the authority's day-today operating costs are paid by the Housing and Urban Development Department (HUD, a federal agency) and 10 percent by the city.
The sources of the funds used by the authority to perform its functions are as follows:
• Authority-issued bonds (which will be repaid by tenant rents)-60 percent
• Direct federal subsidies-30 percent
• Direct city subsidies-10 percent
1. Should the city include the public housing authority in its reporting entity as a component unit per the criteria of GASB Statement No. 14 (as amended)? If so, how? Explain your response.
2. Suppose the same facts except that the authority did not directly fund the construction of homes. Instead, it lent money to the city's housing department, which in turn lent the funds to home buyers. How, if at all, would your response differ?
3. Suppose, instead, that the city council also served as the authority's board of trustees. How, if at all, would your response differ? Explain