STATE OF MARYLAND
Notes to Combined Financial Statements

1. Financial Statements and Descriptions of Funds and Account Groups:

A. Financial Statements:

The accompanying financial statements of the State of Maryland present the financial position of the
various fund types and account groups, the results of operations of the various fund types, and the changes in
financial position of the enterprise funds, nonexpendable trust fund and pension trust fund.

The financial statements include the various departments, agencies and other organizational units
governed by the General Assembly and or constitutional officers of the State of Maryland. The following
criteria, as defined in National Council of Governmental Accounting Statement Number 3, was utilized to
determine the entity for the State of Maryland: selection of governing authority, appointment of management,
constitutional officers' ability to significantly influence operations, accountability for fiscal operations and
scope of public service.

B. Fund Accounting:

The financial activities are recorded in individual funds classified by type and described below. The
financial position and operations of each fund are accounted for in separate self-balancing accounts which
represent the fund's assets, liabilities, equity, revenues and expenditures or expenses.

GOVERNMENTAL FUND TYPES
General Fund:

Transactions related to resources obtained and used for those services traditionally provided by a state
government, which are not accounted for in other funds, are accounted for in the general fund. These services
include, among other things, general government, public safety and judicial, health and mental hygiene,
human resources, licensing and regulation, and education (other than higher education institutions).
Resources obtained from federal grants and used for activities accounted for in the general fund consistent
with applicable legal requirements are recorded in the general fund.

Special Revenue Fund:

Transactions related to resources obtained, the uses of which are restricted to specific purposes, are
accounted for in the special revenue fund. The special revenue fund includes resources used for operations
(other than debt service) of the Maryland Department of Transportation Trust Fund, including construction or
improvement of transportation facilities.

Debt Service Funds:

Transactions related to resources obtained and used for the payment of interest and principal on general
long-term debt obligations and transportation debt (other than Maryland Transportation Authority revenue
bonds) are accounted for in debt service funds.

Capital Projects Fund:

Transactions related to resources obtained and used for the acquisition, construction or improvement of
certain capital facilities, including those provided to political subdivisions and other public organizations are
accounted for in the capital projects fund. Such resources are derived principally from proceeds of general
obligation bond issues, federal grants and operating transfers from the State's general fund.

The State enters into long-term contracts for construction of major capital projects and records the
commitments as encumbrances. The State pays the cost of capital projects principally from resources obtained
from general obligation bond proceeds, operating transfers from the general fund and federal grants. These
resources are received, in many cases, after the long-term contracts are executed and recorded as
encumbrances. Accordingly, the undesignated fund balance of the capital projects fund reflects a deficit. This
deficit will be funded by future bond proceeds and capital appropriations from the general fund (see Note 9).

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