Mass Transit System. The City of Dixon operates a mass transit system (DTS) consisting of a network of bus and trolley routes. The following information is provided about the operations and financing of the mass transit system.
1. Operating revenues for the most recent fiscal year amounted to $549,420; operating expenses for the same year amounted to $1,011,843. Operating revenues have covered only 45 to 50 percent of operating expenditures since DTS was established five years ago.
2. The operating deficit (from part 1) of $462,423 was financed jointly by $362,423 from the city’s General Fund and $100.000 in operating grants from the Urban Mass Transit Administration (UMTA). Capital contributions over the past five years have amounted to $3,334,286 divided about evenly between the city and capital grants from the UMTA.
3. Transit system managers have been pressured at times by city officials to increase bus and trolley fares but are strongly opposed because they believe DTS ridership would drop significantly. Advocates for disadvantaged groups have also lobbied hard to keep the current fares. Thus, for at least the next several years, the city plans to provide an annual operating subsidy to DTS to cover its operating deficit, less any operating grants received from UMTA or other sources.
4. Until now the accounting and reporting for DTS has been as an enterprise fund of the city. The city finance director and the head of the mass transit system would like to continue to use enterprise fund accounting; however, influential members of the finance committee of the city council are insisting that, since DTS is never expected to break even, it should use special revenue fund accounting. Changing to a special revenue fund also means that DTS will require council-approved appropriations for its expenditures.
Required
a. Develop an argument for retaining enterprise fund accounting.
b. Develop an argument for adopting special revenue fund accounting.
c. How would GASB require the transit system to be reported?