FMW7HW

Please read “The Stratton Township Park” (ATTACHED). Complete questions 1-5 listed below. Compile your answers in a Word document.

 

Question 1: Prepare an annual program budget for the Stratton Township Park including golf operations; the pool; concerts; other park activities including tours, nature visitors, and general concessions; and administrative costs. Show the line-item details for each function by natural account and summarize the budget for the park as a whole. 

Because of the current fiscal situation, the Stratton Township needs to reduce its operating costs. As usual, the park is on the list of targeted operations. As the finance director for the township, you have been asked to work with the park’s manager to explore possible options. 

Question 2: Based on the information in the budget, find the break-even green fees for the golf course and the break-even admissions charges for the pool. You may assume that the volume of users will not change with increases in pricing. You may also assume that the course will operate for a full 130 days. 

a. Do both break even analyses based on the cost of delivering services with and without the allocated management salaries. 

b. Do you think the park can realistically charge these fees to park users? What might the consequences of raising fees be economically, politically, and in a public relations sense? 

Question 3: The park manager wants to know whether it makes sense to shut down one or more of the operations at the Stratton Township Park. Determine the impact of shutting down the golf course, the pool, the concert series, and the tours, and show the overall marginal impact of making each of these changes. Be sure to include all marginal revenues and all marginal expenses in your calculations. 

Question 4: After completing these analyses, the manager has decided to recommend three changes to the Park’s budget. 

First, he plans to increase green fees for golf to $5 above the break-even price excluding allocated management costs and rounded to the next highest multiple of $.50. Since competitive private clubs in the region cost $100 or more for a round of golf, he does not believe that an increase in price will result in a decline in the number of golfers using the course. 

Second, he wants to raise pool admission charges to $4.50. Given the demographics of those who use the pool, he believes that raising prices by $1.00 will result in a 5% drop in attendance. 

Third, he wants to eliminate three of the concerts the township had planned for the next year. 

Prepare a revised budget for the Stratton Township Park reflecting these changes. Will these budget modifications meet the township’s goal of reducing the subsidy it would have given to the park in the next fiscal year by 20%? 

Question 5: After receiving your analysis of the impact of eliminating the concerts and raising green fees and pool admission charges, the park manager has asked you to come up with some additional proposals for meeting the township’s subsidy reduction goal. What would you recommend?

References:

Financial Management for Public Health and Not-for-Profit Organizations (4th edition)

Assignment reading attached!

1

2. Explain variable and fixed costs, direct and indirect costs, and cost accounting principles for
healthcare services or processes.
2.1 Evaluate unique rules of financial accounting for not-for-profit and healthcare organizations.
2.2 Discuss fund accounting, including the typical types of funds, interfund transactions, and the

current use of fund accounting by not for-profit organizations.

5. Discuss change, innovation, and learning as they relate to the financial management of health care
organizations.
5.1 Discuss special rules related to the recognition and reporting of donated goods and services.
5.2 Explain the treatment of investments by not-for-profit and healthcare organizations on

financial statements.

Reading Assignment

Chapter 12:
Unique Aspects of Accounting for Not-for-Profit and Health Care Organizations

Chapter 13:
Unique Aspects of Accounting for State and Local Governments—Part I: The Recording Process

Chapter 14:
Unique Aspects of Accounting for State and Local Governments—Part II: Reporting Financial Results

Unit Lesson

The general principles of accounting are broadly applied to all types of organizations, and as you learned last
unit, the Generally Accepted Accounting Principles (GAAP) should prevail as we prepare financial statements.
However, there are many unique aspects of financial accounting for healthcare, not-for-profit, and
governmental organizations. Unit VII considers unique financial issues for not-for-profit and healthcare
organizations in particular. You will learn that there are certain unique aspects of managing and financial
reporting when healthcare services are involved. This relates, at least in part, to the fact that healthcare in our
nation began as a charitable undertaking, with medical facilities often being operated by churches and other
charitable organizations.

Not-for-profit organization financial statements contain a number of important distinctions from the statements
issued by for-profit organizations. For example, donor-imposed restrictions on net assets must be disclosed in
the statement of financial position (balance sheet). A statement of functional expenses must be provided for
voluntary health and welfare organizations. A specific set of conditions must be met for donated services to
be recorded and reported on the financial statements. All of this is essential due to the not-for-profit status of
the organization. Failure to comply with all of these very specific financial reporting rules could lead to the loss
of not-for-profit status for the organization. That would mean that the organization must begin paying taxes.

Healthcare organizations must report their revenues net of contractual allowances and charity care. Bad
debts must be reported as an expense rather than as a revenue offset. Charity care is not included as a bad
debt expense or revenue offset. The only place that it shows up is in the notes which accompany the financial
statements. You need to very clearly understand charity care and what that means for healthcare facilities.

2

UNIT x STUDY GUIDE

Title

Charity Care

Many U.S. states provide charity care for patients who meet certain financial requirements. This obligation on
behalf of the hospital is part of an ongoing requirement to hold not-for-profit status in the state, and it is
mandated, not optional. Charity care must be provided if the hospital wishes to retain its not-for-profit status,
ability to receive tax-deductible donations, and avoid paying taxes, so getting this part right is extremely
important to hospitals. Failure to keep track of charity care responsibilities on an annual basis can quickly
result in reversal of a healthcare facility’s not-for-profit status and substantial new tax burdens for future fiscal
years.

Charity care specifically refers to a hospital’s practice of waiving or reducing fees charged to patients who
have incomes which are too low to afford the full cost of the medical care provided. This concept came about
through the Hill-Burton Act of 1946, which funded the construction of many community hospitals across our
nation. It was immediately after World War II, and America needed two things simultaneously: it needed more
and better hospitals to provide care for our rapidly growing population, and it needed jobs for thousands of
returning servicemen. The Hill-Burton Act served to address both needs. The simple concept of Hill-Burton is
if an American community wanted to receive federal funds to build a hospital for its local citizens, the
community would also be agreeing to the rules for charity care which appeared in the Hill-Burton Act. As with
most federal funding scenarios, there were strings attached to accepting Hill-Burton funding.

The specific requirements for providing charity care differ considerably from state to state, and they are
defined by a variety of specific criteria. However, in all cases, hospitals that desire not-for-profit status, and all
the benefits that come with it, must provide charity care for the community. Let us take a few specific
examples here.

Washington: A true national leader and innovator in this area is the state of Washington. The Washington
State Department of Health mandates that not-for-profit hospitals provide charity care to patients who cannot
afford to pay the full cost of care. The law specifically defines eligibility for charity care as any individual
whose income is less than 100% of the federal poverty level (FPL), or any family whose combined income is
less than 200% of the FPL. Also, in order to qualify for charity care, the patient must be ineligible for any form
of public health insurance, such as the Medicaid program or Medicare program. If the patient is eligible for
one of these forms of public health insurance, then the hospital must assist him or her in applying for
coverage. Absent such eligibility, the charity care rules apply.

Under Washington state laws, reduced fees for hospital care for families are provided on a sliding scale basis,
but individuals who qualify for charity care must be treated free of charge. It is a violation of law for the
hospital to charge an individual for services if he or she qualifies for charity care.

Additionally, Washington requires that a hospital must notify any patient when he or she is eligible for charity
care. The charity care obligation is not based simply upon waiting for the patient to ask; it must be a proactive
effort of the hospital to meet the charity care program requirements and educate patients about their eligibility.

The state of Washington is generally considered to be among the leaders nationally in promoting the
availability of charity care for patients who truly need it. Their model has been adopted by several other states
over recent years. You will see similarities among the other states which we will use as examples here.

New Jersey: The state of New Jersey permits patients to receive free or reduced price hospital care for what
it deems to be necessary medical care. The precise definition of necessary medical care varies significantly
from state to state, with the New Jersey definition being broader than that in many other states. To receive
charity care in New Jersey, a patient can either have no health insurance or partial health insurance
coverage. However, the patient cannot qualify for any kind of public health insurance program such as
Medicare or Medicaid. The patient must also meet the New Jersey income requirements. If the patient earns
less than 200% of the federal poverty level (FPL), he or she will quality for charity care—no charges for
services. As the percentage of the FPL increases in 25% increments, the percentage of costs charged to the
patient increases by 20%.

3

UNIT x STUDY GUIDE
Title

California: The state of California also has laws which mandate charity care in hospitals for patients who do
not have sufficient insurance coverage to pay the full hospital bill. Patients who do not earn enough money to
cover the full cost of care can benefit from this program. In California, a patient must earn only a certain
percentage of the federal poverty level (FPL) in order to qualify for no cost or discounted hospital care. This
percentage actually varies from city to city, and hence hospital to hospital, within the state. That situation is
unique to California. Most states establish eligibility criteria that apply across the state, not varying from city to
city.

Conclusion

Overall, you will find that the principles of GAAP do apply to healthcare organizations, but there are a few
wrinkles. Charity care, and the accounting for that care, is certainly an example. Over recent years, more than
a few hospitals have found themselves in trouble over their handling of charity care, so it is extremely
important for the hospital CFO, CEO, and mangers to understand this issue.

Suggested Reading

The resources below expand upon the material in the unit lesson.

Alliance for Advancing Nonprofit Health Care. (n.d.). Basic facts and figures on nonprofit health care.
Retrieved from http://www.nonprofithealthcare.org/resources/

Washington State Department of Health. (n.d.). Charity care in Washington hospitals. Retrieved from
http://www.doh.wa.gov/DataandStatisticalReports/HealthcareinWashington/HospitalandPatientData/H
ospitalPatientInformationandCharityCare/CharityCareinWashingtonHospitals

308 Part IV • Case Studies

Mi f¾W§@@

CASE STUDY

The Stratton Township Park

The Stratton Township Park is located on a pie.ce of property that contains two golf
courses, a swimming pool, and 800 acres of woods and open spaces. Three years ago,
the Stratton Parks Department (Stratton) carved out miles of trails to allow visitors to
hike the property and enjoy nature. To make that experience more enjoyable for visi­
tors and available to school groups, Stratton decided to offer guided tours that have
proven popular. It has also found that the availability of the hiking trails has increased
park visits.

To operate the park, the pool, and the two golf courses, Stratton employs a full-time
park manager with an $80_,000 annual salary, an assistant manager who earns $�per
year, and a full-time maintenance staff who earn a total of 1350,000 per }’_ear. The assistant
manager spends 50 percent of her time managing the golf course, 15 percent on pool
operations, 5 percent organizing concerts, and the remainder on general park operations.
Benefits for these full-time employees add 35 percent to personnel costs. Total deprecia­
tion for the coming year will be. $450,000. Of that amount, $25,000 is for the park’s central
facility where the manager and assistant manager work. Central supply and central utility
costs are expected to be $10,000. Utility and fuel costs for the trail and wilderness areas
of the park are an additional $100,000 per year. Stratton expects 30,000 cars ful1 of people
to come to the park in the corning year. Stratton charges $8 for parking.

Stratton plans to have the golf courses open seven days per week for twenty
weeks each year. Out of the total 140 days in that time period, management expects to
be able to allow play on 130 days during those weeks with golfers playing a forecast
15,600 rounds. The average expected green fee is $32.50 per round of golf. Golfers
account for 11,200 of the cars that pay to park at Stratton.

Management expects 40 percent of the golfers to hire a caddy at a fee of $12 per
round. The course has a group of caddies available every day th1� courses are open and

pays each of the ten caddies who work at the course $50 per day regardless of the num­
ber of rounds they work. Caddies are seasonal workers and do not receive benefits.

Stratton also hires two seasonal people to handle reservations and scheduling. Each
scheduler is paid $500 per week. The park also employs three people to staff the check-in
desk. Each of the check-in people is paid $10 per hour. They work 40 hours per week.
None of the seasonal employees receive benefits. The forecast seasonal cost for pa1ts and
supplies for the golf course is $60,000. Total fuel and utility costs related to operating and
maintaining the golf course are forecast to be $60,000 for the season.

Depreciation expenses for the golf courses for the coming fiscal year will be $160,000.
Stratton allocates $800 worth of maintenance staff expenses to the golf course for each of
the maximum 140 days that the course is available during the 20-week season regardless
of whether the course is open for play or not and $400 per day throughout the remainder of
the year. The golf courses are allocated $750 per week of the park manager’s sala1y for each
of the 20 weeks the courses are open for play. The park’s assistant manager is in charge of
the golf course. Seventy-five percent of her salary is charged to the golf course.

Were the golf course to close, Stratton would lay off two maintenance workers who
earn a combined total of $70,000 plus benefits. Given the seniority these employees have,
the township would have to offer these workers other positions elsewhere in the town­
ship’s operations at their current salaries. W hile their salaries would not be an expense
for the Park, the township would still have to pay their salaries.

Stratton employs a pool manager for 13 weeks during the summer at a salary of
$1,000 per week including benefits. Depreciation expenses for the pool and related
equipment are $2,000 per week. Stratton also allocates $500 of the park manager’s salary
to pool operations each week. However, the park manager would still be employed by
Stratton regardless of whether the pool i.? open or not.

To operate the pool, Stratton also employs a head lifeguard at a cost of $160 per
day and six other lifeguards at a total daily cost of $600. Stratton also uses $50 worth of
chemicals per day and $235 worth of electricity each day the pool is open. Repairs are
done by the park’s regular maintenance staff. $300 worth of the maintenance workers’
time is allocated to the pool for each day the pool is open. If the maintenance staff were
not working on the pool, they would be doing other things. Maintenance parts and sup­
plies cost the park an average of $60 per day of pool operation. The pool operates seven
days per week throughout the 13-week season.

Stratton currently charges each swimmer an average of $3.50 per day for admission,
and attendance averages 300 people per day. Swimmers account for 5,460 of the cars that
pay for parking.

Nature tours are popular, and management expects 600 individuals and 80 groups
to go on tours next year. Individuals pay $2.50 per tour and the group charge is $25
regardless of the size of the group. Tours are guided by Stratton High School students.
Stratton donates $50 per day to the school’s activities fund for each of the 60 days the
student guides volunteer at the park.

The rest of the visitors to the park come to picnic, hike the nature trails, use the
sports field, and generally enjoy the outdoors. In a typical year, 30,000 of these “nature”
visitors use the park. The remainder of the 30,000 cars that came to the park were driven
by “nature” visitors.

Stratton also has five concession stands distributed throughout the park as well as the
Nineteenth Hole Restaurant at the golf course and the Swimming Hole Snack Bar at the pool.
Concessionaires pay the park a flat fee of $15,000 per season for each of the five stands,
$35,000 for the Nineteenth Hole, and $20,000 for the Swimming Hole. In addition, each
concessionaire pays the park 5 percent of their gross receipts. Total depreciation for the con­
cessions’ facilities will be $60,000. Maintaining the facilities will require $40,000 of allocated
maintenance staff time and $30,000 in supplies. Forty-five percent of the maintenance labor,

supply, and depreciation costs are related to the Nineteenth Hole, 30 percent is for the
Swimming Hole Snack Bar, and the remainder is for the other concession stands.

Each “nature” visitor spends $4 at one of the park’s five general concession stands.
Half of the golfers who play on the Stratton courses stop for a meal at the Nineteenth
Hole and spend an average of $25. Swimmers spend an average of $3.50 per clay at the
Swimming Hole Snack Bar.

During the summer months, Stratton also offers a series of five f ee conceits for
area residents. On average, 5,000 people come to each concert in 1,400 cars. These cars
are in addition to the 30,000 cars that pay for daily parking. Each concert costs the town­

rship $20,000. The only revenue generated by the concerts comes f om parking fees and
concession sales. During a typical concert, attendees spend an average of $5 per person

Q