HomeMy WebLinkAbout7A Management LetterCITY OF PRIOR LAKE
PRIOR LAKE, MINNESOTA
MANAGEMENT LETTER
YEAR ENDED
DECEMBER 31, 2008
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Edina, MN 55436
Management, Honorable Mayor and City Council
City of Prior Lake
Prior Lake, Minnesota
April 11, 2009
We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the
aggregate remaining fund information of the City of Prior Lake, Minnesota (the City) for the year ended December 31, 2008,
which collectively comprise the City's basic financial statements and have issued our report thereon dated April 11, 2009.
Professional standards require that we provide you with the following information related to our audit.
Our Responsibility under Auditing Standards Generally Accepted in the United States of America
As stated in our engagement letter, our responsibility, as described by professional standards, is to express opinions about whether
the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity
with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not
relieve you or management of your responsibilities.
Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements
are free of material misstatement. As part of our audit, we considered the internal control over financial reporting of the City. Such
considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such
internal control over financial reporting. We are responsible for communicating significant matters related to the audit that are, in
our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not
required to design procedures specifically to identify such matters.
Significant Audit Findings
Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and
would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or
material weaknesses. However, as discussed below, we identified certain deficiencies in internal control that we consider to be
significant deficiencies.
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a
control deficiency, or combination of control deficiencies, that adversely affects the City's ability to initiate, authorize, record,
process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a
remote likelihood that a misstatement of the City's financial statements that is more than inconsequential will not be prevented or
detected by the entity's internal control over financial reporting. We consider the following deficiencies to be significant
deficiencies in internal control over financial reporting.
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City of Prior Lake
April 11, 2009
Page 2
2008-1 Limited Segregation of Duties (finding since 2007)
Condition: During our audit, we reviewed procedures over investments, cash disbursements,
cash receipts, capital assets and payroll and found the City to have limited
segregation of duties related to these procedures.
Criteria: There are four general categories of duties: authorization, custody, record keeping
and reconciliation. In an ideal system, different employees perform each of these
four major functions. In other words, no one person has control of two or more of
these responsibilities.
Cause: Investments: During the year the finance director initiated the investment
transactions, maintained and posted activity to the fmance system and reconciled the
investment accounts.
Cash disbursements: During the year, the accounting clerk had access to the check
stock, prepared the checks, entered transactions into the accounting system, had
access to the City's automated check signing machine and had bank reconciliation
responsibilities.
Cash receipts: During the year, the accounting clerk had responsibility over setting
up vendors, opening the mail, posting transactions to the general ledger, preparing
the deposit and reconciling the bank account.
Capital Assets: During the year, the accounting clerk had responsibility over tracking
capital assets purchases, recording and reconciling the activity.
Payroll: During the year, the accounting supervisor set up employee records, ran
payroll, approved payroll, posted transactions to the general ledger, prepared checks,
initiated direct deposit and prepared the quarterly tax returns.
Effect: The existence of this limited segregation of duties increases the risk of fraud and
error.
Recommendation: The current system is very efficient but we recommend that the City review processes
and consider modifying procedures to ensure a better separation is created.
Management Response: Management recognizes that it is not economically feasible to correct this finding, is
aware of the deficiency, is in the process of implementing compensating controls, and
is relying on oversight by management and the Council to monitor this deficiency.
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City of Prior Lake
April 11, 2009
Page 3
2008-2 Preparation of Financial Statements (finding since 2007)
Condition: As in prior years, we were requested to draft the audited financial statements and
related footnote disclosures as part of our regular audit services. Recent auditing
standards require auditors to communicate this situation to the Council as an internal
control deficiency. Ultimately, it is management's responsibility to provide for the
preparation of your statements and footnotes, and the responsibility of the auditor to
determine the fairness of presentation of those statements. It is our responsibility to
inform you that this deficiency could result in a material misstatement to the financial
statements that could have been prevented or detected by your management.
Essentially, the auditors cannot be part of your internal control process.
Criteria: Internal controls should be in place to provide reasonable assurance over financial
reporting.
Cause: From a practical standpoint we do both for you at the same time in connection with
our audit. This is not unusual for us to do with an organization of your size.
Effect: The effectiveness of the internal control system relies on enforcement by
management. The effect of deficiencies in internal controls can result in undetected
errors in financial reporting.
Recommendation: It is your responsibility to make the ultimate decision to accept this degree of risk
associated with this condition because of cost or other considerations. As in prior
years, we have instructed management to review a draft of the auditor prepared
financials in detail for their accuracy; we have answered any questions they might
have, and have encouraged research of any accounting guidance in connection with
the adequacy and appropriateness of classification of disclosure in your statements.
We are satisfied that the appropriate steps have been taken to provide you with the
completed financial statements. While the City is reviewing the financial statements
we recommend that a disclosure checklist be utilized to ensure all required
disclosures are presented and the City should agree its financial software to the
numbers reported in the financial statements.
Management Response: For now, the City's management accepts the degree of risk associated with this
condition and thoroughly reviews a draft of the financial statements.
A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote
likelihood that a material misstatement of the financial statements will not be prevented or detected by the City's internal control
over financial reporting. We believe that none of the deficiencies listed above constitute a material weakness.
As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed
tests of compliance with certain provisions of Minnesota statutes. However, the objective of our tests was not to provide an
opinion on compliance with such provisions. We noted no instances of noncompliance with Minnesota statutes.
Planned Scope and Timing of the Audit
We performed the audit according to the planned scope and timing previously communicated to you
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City of Prior Lake
April 11, 2009
Page 4
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used
by the City are described in Note 1 to the financial statements. The requirements of GASB 45 were adopted during the year. We
noted no transaction entered into by the governmental unit during the year for which there is a lack of authoritative guidance or
consensus. There are no significant transactions that have been recognized in the financial statements in a different period than
when the transaction occurred.
Accounting estimates are an integral part of the financial statements prepared by management and are based on management's
knowledge and experience about past and current events and assumption about future events. Certain accounting estimates are
particularly sensitive because of their significance to the financial statements and because of the possibility that future events
affecting them may differ significantly from those expected. Depreciation on capital assets is an estimate based on the planned
useful lives of the City's capital assets.
The disclosures in the fmancial statements are neutral, consistent, and clear. Certain financial statement disclosures are particularly
sensitive because of their significance to financial statement users.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing our audit
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those
that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements
In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either
individually or in the aggregate, to the financial statements taken as a whole. There were no entries that would meet the
requirements discussed above.
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a fmancial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's
report. We are pleased to report that no such disagreements arose during the course of our audit.
Management Representations
We have requested certain representations from management that are included in the management representation letter dated
April 11, 2009.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to
obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the
governmental unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those
statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all
the relevant facts. To our knowledge, there were no such consultations with other accountants.
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City of Prior Lake
April 11, 2009
Page 5
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with
management each year prior to retention as the City's auditors. However, these discussions occurred in the normal course of our
professional relationship and our responses were not a condition to our retention.
Other Matters
The following are areas that came to our attention during the audit that we feel should be reviewed:
Financial Position and Results of Operations
Our principal observations and recommendations are summarized on the following pages. These recommendations resulted
from our observations made in connection with our audit of the City's financial statements for the year ended
December 31, 2008.
General Fund
The General fund is used to account for resources traditionally associated with government, which are not required legally or
by sound principal management to be accounted for in another fund. The General fund balance increased $468,769 from 2007.
The fund balance of $5,489,435 is 44percent of the 2009 budgeted expenditures. We recommend the fund balance be
maintained at a level sufficient to fund operations until the major revenue sources are received in June. We feel a reserve of
approximately 35 to 50 percent of planned expenditures and transfers out is adequate to meet working capital and small
emergency needs.
The Office of the State Auditor (the OSA) has issued a Statement of Position relating to fund balance stating "a local
government should identify fund balance separately between reserved and unreserved fund balance. The local government
may assign and report some or all of the fund balance as designated and undesignated." The OSA also recommends local
governments adopt a formal policy on the level of unreserved fund balance that should be maintained in the general and special
revenue funds. This helps address citizen concerns as to the use of fund balance and tax levels.
The purposes and benefits of a fund balance are as follows:
• Expenditures are incurred somewhat evenly throughout the year. However, properly tax and state aid revenues are not
received until the second half of the year. An adequate fund balance will provide the cash flow required to finance the
governmental fund expenditures.
• The City is vulnerable to legislative actions at the State and Federal level. The State continually adjusts the local
government aid and property tax credit formulas. We also have seen the State mandate levy limits for cities over 2,500
in population. An adequate fund balance will provide a temporary buffer against those aid adjustments or levy limits.
• Expenditures not anticipated at the time the armual budget was adopted may need immediate Council action. These
would include capital outlay, replacement, lawsuits and other items. An adequate fund balance will provide the
fmancing needed for such expenditures.
• A strong fund balance will assist the City in obtaining, maintaining or improving its bond rating. The result will be
better interest rates in future bond sales.
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City of Prior Lake
April 11, 2009
Page 6
A table summarizing the General fund balance in relation to budget follows:
2004
2005
2006
2007
2008
Unreserved
Fund Balance
December 31
$ 4,370,829
4,297,370
5,276,400
5,020,666
5,489,435
Budget
Year
2005
2006
2007
2008
2009
General
Fund
Budget
$ 9,716,031
10,840,734
11,685,807
12,426,431
12,476,974
Fund Balance as a Percent of Budget
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
Percent
of Fund
Balance to
Budget
45.0
40.0
45.0
40.0
44.0
$10,840,734 $11,685,807
$9,716,031 $12,426,431 $12,476,974
45.0% 40.0% 45.0% 40.0% 44.0%
2004 2005 2006 2007
-~ Actual Fund Balance -~-Budget
2008 2009
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City of Prior Lake
April 11, 2009
Page 7
The 2008 operations are summarized as follows:
Revenues
Expenditures
Excess of revenues over expenditures
Other financing sources (uses)
Transfers in
Transfers out
Total other financing sources (uses)
Net change in fund balances
Fund balances, January 1
Fund balances, December 31
Variance with
Final Final Budget -
Budgeted Actual Positive
Amounts Amounts (Negative)
$ 12,126,431 $ 11,721,394 $ (405,037)
10,849,950 9,976,350 873,600
1,276,481 1,745,044 468,563
300,000 300,000 -
(1,576,481) (1,576,275) 206
(1,276,481) (1,276,275) 206
- 468,769 468,769
5,020,666 5,020,666 -
$ 5,020,666 $ 5,489,435 $ 468,769
• The largest revenue variances were as follows:
• Taxes were $184 thousand under budget
• License and permits were $170 thousand under budget
• The largest expenditure variances were as follows:
• Fire department was $135 thousand under budget, mainly in other services and charges
• Contingency reserve was $185 thousand under budget
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j ~ City of Prior Lake
April 11, 2009
Page 8
J t~
•'' -
A more detailed comparison of actual General fund revenues and transfers with the prior three years is as follows:
Percent
of
Source 2006 2007 2008 Total
Taxes $ 7,045,404 $ 8,132,478 $ 8,498,514
Licenses and permits 832,610 517,662 455,955
Intergovernmental 1,155,058 1,240,355 1,239,244
Charges for services 1,193,084 1,016,212 952,319
Fines and forfeitures 194,641 190,650 192,428
Interest on investments 211,079 288,869 278,478
Miscellaneous 1,147,283 112,733 104,456
Transfers in 280,000 250,000 300,000
Total revenues and transfers $ 12,059,159 $ 11,748,959 $ 12,021,394
The past three years revenues and transfers are graphically presented as follows:
Revenues and Transfers
$9,000,000
70.7
3.8
10.3
7.9
1.6
2.3
0.9
2.5
100.0
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2, 000, 000
$1,000,000
$-
2006 2007 2008
-•--Taxes --~-Intergovernmental ~1rChargesforservices -CIE--Other
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April 11, 2009
Page 9
A more detailed comparison of actual expenditures and transfers with the prior three years is as follows:
Percent
of
Program 2006 2007 2008 Total
Current
General government $ 2,001,747 $ 2,192,485 $ 2,288,191 19.9
Public safety 3,609,424 3,716,013 3,793,626 32.8
Public works 1,520,959 1,734,375 1,724,639 14.9
Culture and recreation 1,639,960 1,655,042 1,768,109 15.3
Economic development 145,042 109,632 110,567 1.0
Contingency 141,674 107,498 90,000 0.8
Total current 9,058,806 9,515,045 9,775,132 84.7
Capital outlay 230,761 786,210 201,218 1.7
Transfers out 1,790,562 1,703,438 1,576,275 13.6
Total expenditures and transfers $ 11,080,129 $ 12,004,693 $ 11,552,625 100.0
The prior three years expenditures and transfers are graphically presented as follows:
Expenditures an d Transfers
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$-
2006 2007 2008
t General government Public safety ~ Culture and recreation ~k~Transfers out Other
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Nonmajor Special Revenue Funds
City of Prior Lake
April 11, 2009
Page 10
Nonmajor special revenue funds are used to account for revenue that is to be used for a specific purpose. A summary of the
special revenue funds and fund balances is shown below:
Fund
Fund Balances
December 31,
2008 2007
Increase
(Decrease)
Capital Park
Severance Compensation
EDC Revolving Loan
ED MN Revolving Loan
DAG
Cable Franchise
EDA
Total
$ 98,637 $ 74,468 $ 24,169
310,892 369,393 (58,501)
102,107 95,012 7,095
79,292 73,782 5,510
760,078 849,811 (89,733)
29,247 39,425 (10,178)
97,149 95,366 1,783
$ 1,477,402 $ 1,597,257 $ (119,855)
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April 11, 2009
Page 11
Capital Projects Funds
The following funds account for capital projects:
Fund
Major
Construction
Trunk Reserve
Water Storage
Subtotal
Nonmajor
Downtown Redevelopment
Tax Increment
Revolving Equipment
Street Oversizing
Tax Increment 1-3 Lakefront
Tax Increment 3-1 Creekside
Tax Increment 4-1
Tax increment 6-1 Shephards Path
Building
Subtotal
Total
Fund Balances (Deficits)
December 31,
Increase
2008 2007 (Decrease)
$ 744,631 $ 811,968 $ (67,337)
1,026,109 1,322,544 (296,435)
486,845 9,912,602 (9,425,757)
2,257,585 12,047,114 (9,789,529)
37,152 34,570 2,582
115,095 86,927 28,168
1,618,515 1,223,235 395,280
461,805 54,010 407,795
63,053 46,516 16,537
30,471 20,695 9,776
2,083 941 1,142
14,766 130 14,636
310,340 2,073,162 (1,762,822)
2,653,280 3,540,186 (886,906)
$ 4,910,865 $ 15,587,300 $ (10,676,435)
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April 11, 2009
Page 12
Debt Service Funds
Debt service funds are a type of governmental fund to account for the accumulation of resources for the payment of interest
and principal on debt (other than enterprise fund debt).
Debt service funds may have one or a combination of the following revenue sources pledged to retire debt as follows:
• Property taxes -Primarily for general City benefit projects such as parks and municipal buildings. Property taxes may
also be used to fund special assessment bonds which are not fully assessed.
• Tax increments -Pledged exclusively for tax increment/economic development districts.
• Capitalized interest portion of bond proceeds -After the sale of bonds, the project may not produce revenue (tax
increments or special assessments) for a period of one to two years. Bonds are issued with this timing difference
considered in the form of capitalized interest.
• ~ecial assessments -Charges to benefited properties for various improvements.
In addition to the above pledged assets, other funding sources may be received by Debt Service funds as follows:
• Residual project proceeds from the related capital projects fund
• Investment earnings
• State or federal grants
• Transfers from other funds
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April 11, 2009
Page 13
All bonds have adequate resources at year end to pay their obligations. The table below summarizes the obligations
outstanding.
Total Total Bonds Maturity
Description Cash Assets Outstanding Date
314 Fire Hall Bonds $ - $ - $ 3,600,000 2031
316 Park Referndum - - 5,365,000 2017
317 City Ha112005 - - 9,625,000 2029
318 Fire Station #2 - - 815,000 2013
350 Water Revenue PW Building - - 945,000 2014
351 Water Treatment Plant - - 8,400,000 2032
541 Duluth - - - 2008
542 Candy Cove 75,642 89,874 125,000 2009
543 Oak Ridge 144,221 193,208 250,000 2010
545 Frog Town 161,180 190,932 335,000 2011
546 Pixie Point 184,090 241,755 450,000 2012
547 150th Mitchell Condons 124,172 496,735 1,000,000 2013
549 Tax Increment 2004 23,502 23,502 340,000 2024
550 Breezy Point 410,869 803,487 1,650,000 2014
551 Fish Point 873,948 1,953,461 1,770,000 2015
553 CSAH 82 4,412 5,401 1,140,000 2017
554 Street Reconstruction Bonds 5,637 6,939 1,285,000 2017
555 Brooksville Hills 2008 83,123 510,165 1,300,000 2017
Total $ 2,090,796 $ 4,515,459 $ 38,395,000
The Finance Director reviews the outstanding balance and evaluates the amount needed for levy each year. This is a good
practice and ensures the City will have sufficient resources to provide for future debt service.
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April 11, 2009
Page 14
Enterprise Funds
Water and Sewer Utilities
The Water and Sewer Utilities fund are accounted for in a separate enterprise fund and a summary follows:
The operations for the past three years are graphically presented below:
2006 2007 2008
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
Operating revenues
Operating expenses
Operating income (loss)
Nonoperating
revenues (expenses)
Income before contributions
and transfers
Transfers in
Contributions from developers
Contributions from other funds
Transfers out
Change in
net assets
Cash and investments
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
$ 5,203,016 100.0 % $ 5,087,201 100.0 % $ 4,779,603 100.0
3,554,844 68.3 3,747,373 73.7 3,760,680 78.7
1,648,172 31.7 1,339,828 26.3 1,018,923 21.3
368,896 7.1
422,003 8.3
545,503 11.4
2,017,068 38.8
252,760 4.9
958,911 18.4
351,657 6.8
(500,406) (9.6)
1,761,831 34.6
109,248 2.1
58,818 1.2
(709,025) (13.9)
1,564,426 32.7
2,575,161 53.9
(1,003,826) (21.0)
$ 3,079,990 59.3 % $ 1,220,872 24.0 % $ 3,135,761 65.6
$ 5,451,682 $ 6,631,844 $ 7,088,699
Water and Sewer Utilities Summary
^Operatingrevenues ^Operatingexpenses ^Nonoperatingrevenues(expense
~ Income before transfers ^ Cash and investments
2006
2007
2008
The current cash balance has improved each of the last two years and is very good relative to operations. The current margins
are generating significant cash flow and the cash balance will provide for future expansion and maintenance of the system.
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City of Prior Lake
April 11, 2009
Page 15
Storm Water Utility
The operations for the past three years are graphically presented below:
2006
Operating revenues
Operating expenses
Operating income
Nonoperating revenues
Change in net assets
Cash and investments
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
$ 339,323 100.0 % $ 350,524 100.0 % $ 352,130 100.0
282,143 83.1 267,708 76.4 237,671 67.5
57,180 16.9 82,816 23.6 114,459 32.5
36,150 10.7 28,991 8.3 35,196 10.0
$ 93,330 27.6 % $ 111,807 31.9 % $ 149,655 42.5
$ 291,681 $ 435,640 $ 492,056
Storm Water Utility Summary
2006 2007 2008
^ Operating revenues ^ Operating expenses ^ Nonoperatingrevenues
^ Income beforetransfers ^ Cash and investments
Although the cash balance appears adequate, the City should continue to evaluate operations annually to ensure rates are
sufficient.
2008
2007
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April 11, 2009
Page 16
Transit Services
The operations for the past three years are graphically presented below:
2006 2007
2008
Percent of
Amount Revenues Amount
Percent of Percent of
Revenues Amount Revenues
Operating revenues $ 49,957 100.0 % $ 85,560 100.0 % $ 133,186 100.0
Operating expenses 493,102 987.1 692,071 808.9 553,681 415.7
Operating loss (443,145) (887.1) (606,511) (708.9) (420,495) (315.7)
Nonoperating
revenues (expenses) 579,304 1,159.6 738,204 862.8 603,833 453.4
Change in net assets $ 136,159 272.5 % $ 131,693 153.9 % $ 183,338 137.7
Cash and investments $ 1,223,400 $ 1,434,417 $ 1,488,839
Transit Operations Summary
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
^ Operating revenues ®Operating expenses ®Nonoperating revenues (expenses)
^ Income before transfers ®Cash and investments
Most of the funding for transit services comes from governmental units and their revenue is reported in the nonoperating
revenue (expenses) category representing MVET (Motor Vehicle Excise Tax) state transit aid.
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2006 2007 2008
City of Prior Lake
April 11, 2009
Page 17
Ratio Analysis
The following captures a few ratios from the City's financial statements that give some additional information for trend and peer
group analysis. The peer group average is derived from information available on the website of the Office of the State Auditor.
Our prior year letter had a sample of larger cities where this year has all class 2 cities in the state. Different peer group averages
are used for Cities of the 2nd class (population 20,000 - 100,000).
Ratio Calculation Source 2004 2005 2006 2007 2008
Debt to assets Total liabilities/total assets Government-wide 19% 22% 21% 24% 24%
25% 26% 24% 23% N/A
Debt per capita Bonded debt/population Government-wide $ 911 $ 1,367 $ 1,383 $ 1,805 $ 1,736
$ 1,202 $ 1,233 $ 1,389 $ 1,485 N/A
Taxes per capita Tax revenues/population Government-wide $ 305 $ 340 $ 362 $ 398 $ 371
$ 291 $ 339 $ 381 $ 408 N/A
Capital assets % left to Net capital assets/ Government-wide 72% 78% 77% 77% 77%
depreciate - Govermnental gross capital assets 69% 66% 70% 69% N/A
Capital assets % left to Net capital assets/ Government-wide 68% 79% 78% 77% 77%
depreciate - Business-type gross capital assets 62% 61% 65% 64% \/A
Represents the City of Prior Lake
Peer Group ratio
Debt-to-Assets Leverage Ratio (Solvency Ratio)
The debt-to-assets leverage ratio is a comparison of a city's total liabilities to its total assets or the percentage of total assets that
are provided by creditors. It indicates the degree to which the City's assets are financed through borrowings and other long-term
obligations (i.e. a ratio of 50 percent would indicate half of the assets are financed with outstanding debt).
40%
35%
30%
25%
20%
15%
10%
25% 26%
24% 23%
24%
0
° 21% 24%
19%
2004 2005 2006 2007 2008
-~-City ratio -~- Peer group average
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Bonded Debt per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total bonded debt by the population of the city and represents the amount of
bonded debt obligation for each citizen of the city at the end of the year. The higher the amount, the more resources are needed in
the future to retire these obligations through taxes, assessments or user fees.
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$1,805
$1,736
$1 367 $1,383
$1,485
$1,202 $1,3 89
$911 $1.,233
2004 2005 2006 2007 2008
-®-City ratio -~ Peer group average
Taxes per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total tax revenues by the population of the city and represents the amount of taxes
for each citizen of the city for the year. The higher this amount is, the more reliant the city is on taxes to fund its operations.
$450
$400
$350
$300
$250
$200
2004 2005 2006 2007 2008
~-City ratio ~ Peer group average
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j ~ City of Prior Lake
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Page 19
J t:
•'' -
Capital Assets Percentage (Common-size Ratio)
This percentage represents the percent of governmental or business-type capital assets that are left to be depreciated. The lower
this percentage, the older the city's capital assets are and may need major repairs or replacements in the near future. A higher
percentage may indicate newer assets being constructed or purchased and may coincide with higher debt ratios or bonded debt per
capita.
Governmental Activities
90%
72% 78% 77% 77% 77%
80%
70%
69% 70% 69%
60%
66%
50%
40%
30%
90%
85%
80%
75%
70%
65%
60%
55%
50%
2004 2005 2006 2007 2008
-•- City ratio ~ Peer group average
2004 2005 2006 2007 2008
-e--City ratio -~- Peer group average
Business-type Activities
0
7 0 78% 77% 77%
68%
65% 64%
62% 61%
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Future Statute and Accounting Standard Changes
The following Governmental Accounting Standards Board (GASB) Statements have been issued and may have an impact on
future City financial statements:
2009 Levy Limits
During the 2008 legislative session, Minnesota legislators amended Statutes section 275.71 to enact levy limits for cities over
2,500 in population. This bill is in effect for taxes levied in 2008 through 2010. Annually the levy limit is multiplied by:
1. One plus the lesser of 3.9 percent or the percentage growth in the implicit price deflator.
2. One plus a percentage equal to 50 percent of the percentage increase in the number of households, if any, for the most
recent 12-month period for which data is available, and
3. One plus a percentage equal to 50 percent of the percentage increase in the taxable market value of the jurisdiction due
to new construction of class 3 property, as defined in section 273.13, subdivision 4, except for state-assessed utility and
railroad property, for the most recent year for which data is available.
In addition there are special levies that are currently allowed outside any levy limit. They are listed below:
• Debt levies -includes bonds, most certificates of indebtedness and levies to pay the local share of bonds issued by
another political subdivision
• Voter approved levy increases
• To pay federal or state matching fund requirements for programs instituted after 2001
• For costs to prepare for, or recover from, natural disasters -upon approval by the commissioner of revenue
• To pay amounts related to errors in levy certification in the previous year
• To pay for property tax abatements
• To pay increases in the employer share of PERA pension costs since 2001
• To pay operating and maintenance costs of county jails to the extent that the cost is required by the Deparhnent of
Corrections Rules and Standards.
• To pay for a lake improvement district
• To repay a federal or state loan issued to help a local government pay the required local share of a federal or state
transportation or other capital project
• To pay court administration costs during the period in which court costs were being transferred from the counties to the
state
• To fund required police and firefighters relief funds, to the extent that the costs exceed costs in 2001
• To fund a storm sewer improvement district
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• To fund an animal protection society
• For counties, to pay for the increase in their share of health and human service costs caused by reductions in federal
health and human service grants effective after September 30, 2007
• To fund increased costs of securing, maintaining, and demolishing foreclosed and abandoned housing in cities that
have a 2007 foreclosure rate over a certain percent
• To lost traffic citation revenue and unreimbursed costs of redeployed traffic control agents due to the collapse of the
Interstate 35W bridge
• To fund certain cost increases in police and firefighter costs
• To recoup losses due to any unallotment of city and county general purpose aids and credits
We recommend that the City review all of the options presented when calculating future years levies. There is further guidance
provided by League of Minnesota Cities on how to estimate the 2009 levy limit on their website: www.lmc.org.
GASB Statement No. 51 -Accounting and Financial Reporting for Intangible Assets
This statement was issued in June 2007 and is effective for periods beginning after June 15, 2009.
The new standard characterizes an intangible asset as an asset that lacks physical substance, is nonfinancial in nature, and has an
initial useful life extending beyond a single reporting period. Examples of intangible assets include easements, computer software,
water rights, timber rights, patents, and trademarks.
This statement requires that intangible assets be classified as capital assets (except for those explicitly excluded from the scope of
the new standard, such as capital leases}. Relevant authoritative guidance for capital assets should be applied to these intangible
assets. The statement provides additional guidance that specifically addresses the unique nature of intangible assets, including:
• Requiring that an intangible asset be recognized in the statement of net assets only if it is considered identifiable
• Establishing aspecified-conditions approach to recognizing intangible assets that are internally generated (for example,
patents and copyrights)
• Providing guidance on recognizing internally generated computer software
• Establishing specific guidance for the amortization of intangible assets.
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GASB Statement No. 54 -Fund Balance
This statement was issued in March of 2009 and is effective for periods beginning after June 15, 2010.
This new standard is intended to improve the usefulness of information provided to financial report users about fund balance by
providing clearer, more structured fund balance classifications, and clarifying the definitions of existing governmental fund types.
GASB No. 54 distinguishes fund balance between amounts that are considered nonspendable, such as fund balance associated
with inventories, and other amounts that are classified based on the relative strength of the constraints that control the purposes for
which specific amounts can be spent. The following classifications and defimitions will be used:
• Restricted -amounts constrained by external parties, constitutional provision, or enabling legislation
• Committed -amounts constrained by a government using its highest level of decision-making authority
• Assigned - amounts a government intends to use for a particular purpose
• Unassigned -amounts that are not constrained at all will be reported in the general fund.
In addition to the classifications of fund balance, the standard clarified the definitions of individual governmental fund types, for
example, special revenue funds, debt service funds, and capital project funds.
* * ~ * ~
This report is intended solely for the information and use of Council, management and the Minnesota Office of the State Auditor
and is not intended and should not be used by anyone other than those specified parties.
Our audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of the accounting
records and related data. The comments and recommendations in the report are purely constructive in nature, and should be read
in this context.
If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your
convenience. We wish to thank you for the continued opportunity to be of service and for the courtesy and cooperation extended
to us by your staff.
April 11, 2009
Minneapolis, Minnesota
` ~ ~~~
.~
ABDO, EICK & MEYERS, LLP
Certified Public Accountants
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