Attica Prison, located in upstate New York, was built in 1931, was fully paid for many years ago, and is still being used today. During the 1990s, however, the state developed a scheme to raise resources by selling and leasing back the prison. The state used one of its public authorities, the Urban Development Corporation (UDC), to accomplish the financing arrangement. (One newspaper reporter noted that using the UDC was somewhat ironic because the UDC had been created originally to “facilitate the development of affordable housing for low-income persons.”) This is how the scheme worked. The state sold the prison to the UDC for $200 million, under an arrangement whereby the state leased the prison back from the UDC for 30 years. The state deposited the cash in its General Fund. The UDC got the cash by selling bonds that matured in 30 years. UDC had no difficulty selling the bonds because the annual debt service on the bonds was secured by the annual rental payments made by the state under the lease-purchase agreement with the UDC. When the bonds are fully paid off (interest on the bonds will total $290 million), ownership of the prison will revert to the state.

QUESTION:

1. How should the state report the $200 million inflow in its General Fund statement of revenues, expenditures, and changes in fund balances? Rank the alternative reporting methods in order of best method as: (a) revenues, using the caption “Other;” (b) other financing sources, using the caption “Proceeds from sale and leaseback;” (c) a special item; and (d) an extraordinary item. Give reasons for your ranking.