**Government activities may be less “profitable” thanthey appear**

A city prepares its budget in traditional format, classifyingexpenditures by fund and object. In 2010, amid considerablecontroversy, the city authorized the sale of $20 million in bondsto finance construction of a new sports and special events arena.Critics charged that, contrary to the predictions of arenaproponents, the arena could not be fiscally self?sustaining. Fiveyears later, the arena was completed and began to be used. Afterits first year of operations, its general managers submitted thefollowing condensed statement of revenues and expenses (inmillions):

Revenues from ticket sales	5.7
Revenues from concessions	2.4
Total	8.1
Operating expenses	6.6
Interest on debt	1.2
Total Expenses	7.8
Excess of revenues over expenses	0.3

At the city council meeting, when the report was submitted, thecouncil member who had championed the center glowingly boasted thathis prophecy was proving correct; the arena was “profitable.”Assume that the following information came to your attention:

• The arena is accounted for in a separate enterprise fund.

• The arena increased the number of overnight visitors to thecity. City administrators and economists calculated that theadditional visitors generated approximately $0.1 million in hoteloccupancy tax revenues. These taxes are dedicated to promotingtourism in the city. In addition, they estimated that the ticketand concession sales, plus the economic activity generated by thearena, increased general sales tax revenues by $0.4 million.

• The city had to improve roads, highways, and utilities in thearea surrounding the arena. These improvements, which cost $6million, were financed with general obligation debt (not reportedin the enterprise fund). Principal and interest on the debt, paidout of general funds, were $0.5 million. The cost of maintainingthe facilities was approximately $0.1 million.

• On evenings when events were held in the arena, the city hadto increase police protection in the arena’s neighborhood. Whereasthe arena compensated the police department for police officers whoserved within the arena itself, those who patrolled outside werepaid out of police department funds. The police departmentestimated its additional costs at $0.1 million.

• The city provided various administrative services (includinglegal, accounting, and personnel) to the arena at no charge at anestimated cost of $0.1 million.

• The city estimates the cost of additional sanitation, fire,and medical services due to events at the center to beapproximately $0.2 million.

1. Would you agree with the council member that the arena wasfiscally self?sustaining?

2. In which funds would the additional revenues and expendituresbe budgeted and accounted for?

3. Comment on the limitations of both the traditional objectclassification budget and fund accounting system in assessing theeconomic costs and benefits of a project—such as the sports andspecial events arena.

4. What changes in the city’s budgeting and accounting structurewould overcome these limitations? What additional problems mightthese changes cause?