HomeMy WebLinkAbout10A - 2000 Annual Financial Rpt
MEETING DATE:
AGENDA #:
PREPARED BY:
AGENDA ITEM:
MAY 21, 2001
10 A
RALPH TESCHNER, FINANCE DIRECTOR
CONSIDER APPROV AL OF 2000 ANNUAL FINANCIAL
REPORT AND MANAGEMENT LETTER
DISCUSSION:
History
Council members were distributed a copy of the 2000 Financial
Report along with the management letter as prepared by the certified
public accountant firm of Abdo, Eick and Meyers. The report was
given to you directly to afford sufficient time to review the
document before the May 21st meeting. The audit was conducted in
accordance with generally accepted auditing standards and
represents an independent opinion of the financial results and status
ofthe City of Prior Lake during the year of2000.
Current Circumstances
Contained within the financial report is a legal compliance audit
which was performed to ensure compliance with Minnesota Statutes
in the areas of; contracting and bidding, deposits and investments,
conflicts of interest, public indebtedness and claims and
disbursements. Also attached is a Management Letter prepared by
the auditors that provides highlights of the report as well as any
applicable recommendations.
According to the auditor's tests, the City has complied with the
applicable legal provisions as they apply to the five main categories
stated above. Also noted within their report on internal control is the
fact that no matters involving internal control structure and
operation were observed to contain material weaknesses as defined
by GAS (Government Auditing Standards).
The audit has been prepared in accordance with generally accepted
accounting principals. The primary results indicated within the 2000
audit are:
1.) Actual revenues of $8,289,634 (including transfers in) compared
to budgeted revenues of $7,334,944 or 113% of projection.
2.) Operating expenditures were $7,258,361 compared to budgeted
expenditures 00,334,944 or 99.0% of budget.
3.) Gross revenues exceeded expenditures in the amount of
$1,031,273.
H: \A UDIT\Agendaaudit.doc
16200 Eagle Creek Ave. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245
AN EQUAL OPPORTUNITY EMPLOYER
1'-' i T
The 2000 year-end General Fund balance (which is maintained for
cash flow and emergency purposes) increased to $3,481,261 that
represents a reserve of 47% of the 2000 General Fund Budget or
$1,280,778 above the council recognized 30% threshold. This level
is more consistent with the auditor's previous recommendation of
45-50%.
The reserve growth occurred primarily because of four contributing
factors."
· The first was careful expenditure of budgeted funds. The City
Manager, Finance Director and City department and division
supervisors expect that purchases are made only if needed, and
adhere to this practice.
· The second occurrence is that nearly 23% of the revenue
increase represented one-time revenue windfalls from the
restructuring of franchise fees and intergovernmental emergency
aid.
· Third, growth related revenues such as building pennits were up
30%.
· Fourth, developer agreement revenue came in at more than
$230,000 above projections.
The last two revenue sources are highly elastic and are difficult to
accurately anticipate. The significant increase in our General Fund
balance was a very timely occurrence in light of the property
acquisition and project assistance that is being considered for this
year.
The Management Letter is intended to bring to the City Council's
attention deficiencies or conditions recommended for improvement
within the design or administration of the City's financial
operations. A graphic summary of the City's results of operations
within the General Fund depicting revenues and expenditures is
included. Also, the auditors discuss the importance of maintaining
an adequate fund balance for cash flow purposes and to establish
overall long tern1 financial strength.
AL TERNA TIVES:
The following alternatives are available to the City Council:
1. Accept 2000 Annual Financial Report and Management Letter
as submitted.
2. Delay action according to specific Council reason.
RECOMMENDATION: Staff recommends approval of the management letter and the
financial report for the fiscal year ended December 31, 2000 as
submitted. A City Financial Reporting Form, which is basically a
condensed excerpt of the official document, is required to be
submitted to the Office of the State Auditor by June 30, 2001 along
with this report.
H.IA UDlTlAgendaaudit doc
RECOMMENDED
MOTION:
REVIEWED BY:
Attachments:
H.IA UDlTlAgendaauditdoc
IT
Please feel free to contact Staff prior to the meeting if you have any
questions. Steve McDonald of the finTI Abdo, Eick and Meyers will
make a brief presentation regarding the report and management
letter and respond to any questions the council may have.
Motion to accept the 2000 Annual Financial Report and
Management Letter.
Certified Public Accountanis & Consultants
March 16,2001
7241 Ohms Lane
Suite 200
Minneapolis, MN 55439
Honorable Mayor and City Council
City of Prior Lake
Prior Lake, Minnesota
We have audited the general purpose fmancial statements of the City of Prior Lake for the year ended December 31, 2000 and
have issued our report thereon dated March 16, 2001.
Professional standards require that we provide you with the following information related to our audit.
Our Responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards
As stated in our engagement letter, our responsibility, as described by professional standards, is to plan and perform our audit
to obtain reasonable - but not absolute - assurance that the fmancial statements are free of material misstatement and are fairly
presented in accordance with U.S. generally accepted accounting principles. Because of the concept of reasonable assurance
and because we did not perform a detailed examination of all transactions, there is a risk that material errors, fraud, or other
illegal acts may exist and not be detected by us.
As part of our audit, we considered the internal control 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. A material weakness is a
reportable condition in which the design or operation of one or more of the internal control components does not reduce to a
relatively low level the risk that errors or irregularities in amounts that would be material in relation to the fmancial statements
being audited may occur and not be detected within a timely period by employees in the normal course of performing their
assigned functions.
Our consideration of internal control would not necessarily disclose all matters in internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be a material
weakness, as defmed above. We noted no matters involving the internal control over fmancial reporting and the City's
operation that we consider to be a material weakness.
As part of obtaining reasonable assurance about whether the fmancial statements are free of material misstatement, we
performed tests of compliance with certain provisions of laws, regulations, contracts and grants. However, the objective of
our tests was not to provide an opinion on compliance with such provisions. We noted no instances of non-compliance.
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of
our engagement letter, we will advise management about the appropriateness of accounting policies and their application.
The significant accounting policies used by the City are described in Note 1 to the general purpose fmancial statements. No
new accounting policies were adopted and the application of existing policies was not changed during 2000. We noted no
transactions entered into by the City during the year that were both significant and unusual, and of which - under professional
standards - we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus.
612.835.9090 . Fax 612.835.3261
City of Prior Lake
March 16,2001
Page Two
Accounting Estimates
Accounting estimates are an integral part of the general purpose fmancial statements prepared by management and are based
on management's knowledge and experience about past and current events and assumptions about future events. Certain
accounting estimates are particularly sensitive because of their significance to the general-purpose financial statements and
because of the possibility that future events affecting them may differ significantly from those expected. Depreciation on
enterprise fund fixed assets is an example of an estimate. It is based on the estimated useful life of an asset.
Significant Audit Adjustments
F or purposes of this letter, professional standards defme a significant audit adjustment as a proposed correction of the
general-purpose fmancial statements that, in our judgment, may not have been detected except through our auditing
procedures. We proposed no material audit adjustments.
Disagreements with Management
For purposes of this letter, professional standards defme a disagreement with management as a matter, whether or not
resolved to our satisfaction, concerning a fmancial accounting, reporting or auditing matter that could be significant to the
general-purpose fmancial statements or the auditors' report. Weare pleased to report that no such disagreements arose during
the course of our audit.
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
City's general purpose fmancial statements or a determination of the type of auditors' 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, ther-e were no such consultations with other accountants.
Issues Discussed Prior to Retention of Independent Auditors
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.
Difficulties Encountered in Performing the Audit
We encountered no difficulties in dealing with management in performing our audit.
11.1
City of Prior Lake
March 16,2001
Page Three
Other Matters
The following are items that came to our attention during the audit that we feel should be noted:
Financial Position and Results of Operations
General Fund
The General Fund balance increased $1,031,273 to $3,481,261 at December 31, 2000. Overall, revenue was $954,690
above budget and expenditures were below budget by $78,210. We normally recommend a minimum fund balance reserve
around 50% of planned expenditures. The City has a policy to maintain a reserve of at least 30% of planned expenditures
in fund balance. This provides adequate working capital until major revenue sources are received in July. The current year
fund balance is 47% of2000 budget which is $1,280,778 above the City's recognized 30% threshold for fund balance
reserve. The fund balance in relation to expenditures for the last three years follows:
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
. Exenditures
o Fund balance
. Fund balance as a percent
1998
$6,676,814
$2,254,553
33.77%
1999
$7,405,634
$2,449,988
33.08%
2000
$7,258,361
$3,481,261
47.96%
Some of the purposes and benefits of maintaining an adequate fund balance are as follows:
Purposes and Benefits
Expenditures are incurred somewhat evenly throughout the year. However, currently, property 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 General Fund expenditures.
The City is vulnerable to legislative actions at the State and Federal level. Recent years have seen the State
continually adjusting the local government aid and property tax credit formulas as well as implementing levy
limits. An adequate fund balance will provide a temporary buffer against those aid adjustments and levy limits.
Expenditures not anticipated at the time the annual budget was adopted may need immediate Council action.
These may include capital outlay replacement, lawsuits and other items. An adequate fund balance will provide
the financing needed for such expenditures.
A strong fund balance will assist the City in maintaining or improving its bond rating.
City of Prior Lake
March 16,2001
Page Four
A summary of 2000 General Fund revenue and expenditures is as follows:
Revenue
Expenditures
Other Financing Sources (uses)
Operating transfers in
Operating transfers out
Variance
Favorable
Budget Actual (Unfavorable)
$ 7,134,944 $ 8,089,634 $ 954,690
(6,620,234 ) (6,542,024 ) 78,210
200,000 200,000
(714.710) (716.337) (1.627)
Excess (Deficiency) of Revenue
and Other Sources Over
Expenditures and Other Uses
$
1,031,273
2.449.988
$ 3.481.261
$
1 031.273
Fund Balance, January 1
Fund Balance, December 31
The total positive variance in revenue was 13% of the revenue budget. The majority of this variance came from one
time windfalls or growth related income. The three largest line items are Developer's Agreements ($230,277
variance), Interest ($135, 161 variance) and Building Permits ($123,684 variance). Page 25 of the audit lists all
categories ofrevenue compared with budget. All of the significant items were discussed in the Finance Director's
year end report.
The City has estimated costs of $1 million dollars for property acquisition, project assistance and litigation that is
considered out of the ordinary for 2001. The revenue variance is planned to be used to cover the majority of these
costs.
II iI
City of Prior Lake
March 16,2001
Page Five
A comparison between 2000 and 1999 revenue is presented below:
Percent Increase
of (Decrease)
Revenue Source 2000 Total 1999 From 1999
Property Taxes $ 3,935,702 47.48% $ 3,907,775 $ 27,927
Licenses and Pennits 549,729 6.63 480,713 69,016
Intergovernmental 1,933,628 23.33 1,826,040 107,588
Charges for Services 1,033,203 12.46 739,662 293,541
Fines and Forfeits 107,091 1.29 110,309 (3,218)
Other Revenue 329,495 3.97 239,838 89,657
Interest 200,786 2.42 96,732 104,054
Transfers 200,000 2.42 200,000
Total Revenue S 8.289.6~4 100.00% ~ 7.60 I .06~ $ 688.565
A graphical presentation of2000 revenue totals follows:
2000 Revenue
Fines
1.29%
Charges for Service
12.46%
Taxes
47.48%
Transfers
2.42%
Interest
2.42%
Other Revenue
3.97%
Intergovernmental
23.33%
City of Prior Lake
March 16,2001
Page Six
A comparison between 2000 and 1999 expenditures is presented below:
Percent Increase
of (Decrease)
Programs 2000 Total 1999 From 1999
General Government $ 1,624,061 22.38% $ 1,553,280 $ 70,781
Public Safety
Police 1,639,912 22.59 1,604,751 35,161
Fire 257,976 3.55 248,308 9,668
Other 294,897 4.06 271,026 23,871
Public Works 854,566 11.77 839,384 15,182
Culture and Recreation 1,219,239 16.80 1,135,158 84,081
Other 430,023 5.92 447,866 (17,843 )
Capital Outlay 221,350 3.05 93,713 127,637
Transfers to Other Funds 716.337 ~ 1212,148 (495.811 )
Total Expenditures $ 7.258.361 l.2Q.QQ% $ 7.405.634 $ (]47.273)
A graphical presentation of 2000 expenditures totals by program follows:
2000 Expenditures
Capital Outlay
3.05%
Tranfers
9.88%
General Government
22.38%
Other
5.92%
Public Safety
30.20%
Culture & Recreation
16.80%
I I IT
II II
City of Prior Lake
March 16, 2001
Page Seven
Special Revenue Funds
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 Balance
Capital Park
Severance Compensation
EDC Revolving Loan
Revolving Loan
DAG
Cable Franchise
$
1,165,492
149,457
64,656
11,888
250,515
107.307
I 749.315
$
Increase
1999 (Decrease )
531,782 $ 633,710
209,739 (60,282 )
60,841 3,815
4,912 6,976
93,937 156,578
39.610 67.697
940 821 $ 808.494
2000
Total
$
$
All funds have positive fund balances and provide reserves for future expenditures.
Debt Service Funds
The debt service funds are used to account for the resources accumulated to repay bond principal and interest. The resources
generally consist of special assessments levied against benefiting properties, general property taxes or tax increments. All
bonds appear to have adequate resources at year end to pay their obligations. The table below summarizes the obligations
outstanding.
Total Total Bonds
Cash Assets Outstanding
Fire Hall Bonds $ 1,539,967 $ 1,539,967 $ 3,190,000*
North Shore 1,134,938 2,077,028 1,040,000
Water Tower 577,721 577,721 560,000
Business Office Park (26%) 722,993 786,398 328,900
Business Office Park (74%) 556,377 580,797 936,100
Prior South 88,321 133,285 340,000
Ridgemount 82,587 146,424 530,000
Water Rev. PW Bldg. 152,702 152,702 1,885,000
Northwood 202,925 309,846 620,000
Pike Lake 132,627 281,942 765,000
Park Referendum 7,029,999 7,029,999 14,665,000**
Duluth 249,362 484,513 1,025,000
Candy Cove 170,398 377,357 950,000
Oak Ridge 159.814 517.353 1.125,000
Total $ 12.800.731 $ 14.995 332 $ 27 960.000
*
Includes escrow to provide for prepayment of 1993 Fire Station Bonds totaling $1,540,000 on December 1, 2001.
**
Includes escrow to provide for prepayment of 1997 Park Bonds totaling $7,025,000 on December 1, 2003.
City of Prior Lake
March 16,2001
Page Eight
Capital Project Funds
The following funds account for major capital projects:
Fund Fund
Balance Balance Increase
12/31/00 12/31/99 (Decrease )
Tax Increment $ 260,097 $ 151,940 $ 108,157
Revolving Equipment 802,634 931,296 (128,662 )
Building 67,545 63,538 4,007
Construction 1,100,179 1,181,293 (81,114 )
Trunk Reserve 2,453,127 1,833,446 619,681
Collector Street 1,687,745 1,502,993 184,752
Park Referendum 372,703 1,977,410 (1,604,707 )
Tax Increment 2-1 Keyland 3,584 4,712 (1,128)
Tax Increment 2-2 Becker 3,623 24,096 (20,473 )
Tax Increment 2-3 Amer/Metro 3,710 7,030 (3,320 )
Tax Increment 2-4 Commercial 162,737 138,207 24,530
Tax Increment 2-5 E.M. Prod. 3,812 8,706 (4,894 )
Tax Increment 2-6 NBC 3,116 26,754 (23,638 )
Tax Increment 2-7 A ward Prin. 864 1,789 (925 )
Tax Increment 2-8 D Hansen 165 1.892 (1,727)
Total $ 6925.641 $ 7.855.102 $ (929461 )
All funds have a positive fund balance. As projects are completed, any remaining balances are closed to the fund that
provided the original fInancing.
Enterprise Funds
The Water and Sewer Utility and Storm Water Utility Funds are accounted for in separate enterprise funds and a summary of
each follows.
Water and Sewer Utility Fund
The Water and Sewer Utility Fund results of operations for the past two years are as follows:
Percent of Percent of
Total Total
2000 Revenue 1999 Revenue
Operating revenue
Sewer charges $ 1,585,450 56.0% $ 1,492,977 58.1%
Water charges 768,890 27.2 583,385 22.7
Other 474.135 16.8 493.100 19.2
Total operating revenue 2,828,475 100.0 2,569,462 100.0
Total expenses 1.859,910 65.8 1.851.361 72.1
Operating income $ 968.565 34.2% $ 718 101 27.9%
Cash balance at year end $ 4.094 759 $ 3.004.276
After operating transfers in the form of a budgeted general fund contribution and revenue bond payment transfer, a net income
of$795,175 was realized in 2000 compared to $490,884 in 1999. The current cash balance is needed to provide working
capital and major capital needs. The current margins are generating excellent cash flow and the cash balance will provide for
future expansion and maintenance of the system.
rc
1111
City of Prior Lake
March 16,2001
Page Nine
Storm Water Utility
The Storm Water Utility results of operations for the past two years are as follows:
Percent of Percent of
2000 Revenue 1999 Revenue
Total revenue $ 153,262 100.0% $ 163,286 100.0 %
Total expenses 102,700 67.0 237,705 145.6
Operating income $ 50,562 33.0% $ (74.419) (45 6)%
Cash balance at year end $ 182,134 $ 86.188
The large decrease in expenses came in the repair and maintenance category of expenses. Although the cash balance appears
adequate, the City should evaluate operations annually to ensure rates are sufficient.
Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and
Management's Discussion and Analysis - for State and Local Governments
GASB Statement No. 34 is the result of an almost decade long effort by GASB to reexamine the fmancial reporting
model for state and local governments. The most notable change is the presentation of a set of highly aggregated, "full
accrual" fmancial statements. At the same time, however, the Statement retains many familiar features of current
governmental fInancial reporting, in particular fund-based fmancial statements.
State and local governmental fmancial statement preparers and auditors will need to comprehend and implement a vast
number of changes in accounting and fmancial reporting. They will have to explain those changes to persons who are
unfamiliar with the particulars of accounting, much less the unique area of state and local governmental accounting.
The following are some specific areas that need to be addressed with the implementation of this new statement:
Timeline
GASB Statement No. 34 is effective in three phases based on the total annual revenues of the primary government's
governmental and proprietary funds, although earlier application is encouraged. For this purpose, revenues include all
revenues except for other fmancing sources and certain extraordinary items. Based on this calculation, the City is
considered to be phase 2. Therefore, the City is required to implement GASB Statement No. 34 for the calendar year
ending 2003.
Management's Discussion and Analysis (MD&A)
MD&A gives an objective and easily readable analysis of a government's fmancial activities based on currently known
facts, decisions, or conditions. It presents short and long-term analyses of the government's activities, compares current-
year results with those of the prior year, and discusses the positive and negative aspects of that comparison.
Government-wide Financial Statements
The government-wide fmancial statements are (1) a statement of net assets and (2) a statement of activities. The
statement of net assets presents the government's financial position at a point in time (like a balance sheet does); the
statement of activities presents its activities during a period (like an operating staternent does). These statements present
highly aggregated information for the overall government; they do not display individual funds or fund types. They also
present fmancial information in separate rows and columns for the (1) primary government's aggregate governmental
activities, (2) primary government's aggregate business-type activities, (3) total primary government, and (4) discretely
presented component units.
City of Prior Lake
March 16,2001
Page Ten
Capital Assets
Capital assets are tangible and intangible assets that are used in operations that have initial useful lives longer than one
year. They include land and improvements, easements, buildings and improvements, equipment, and works of art and
historical treasures. Capital assets also include infrastructure assets - normally stationary capital assets that can be
preserved for significantly greater number of years than most capital assets. Infrastructure assets include roads, bridges
and tunnels; water, sewer and drainage systems; darns; lighting systems; and buildings that are an ancillary part of a
network of infrastructure assets. Capital assets are reported in the statement of net assets at historical cost (or estimated
fair value, if donated) and net of accumulated depreciation. They are depreciated in the statement of activities over their
estimated useful lives.
Infrastructure Assets
GASB Statement No. 34 applies prospectively to all general infrastructure assets beginning at the effective dates of the
Statement (or earlier, if the statement is implemented earlier). Governments are also encouraged to apply the Statement
retroactively to all existing major general infrastructure assets at that time. However, phase 2 governments need not
retroactively report those assets until fiscal year 2007 - four years after their required implementation of Statement No.
34. Phase 3 governments are encouraged but not required to report major general infrastructure assets retroactively.
If there are inadequate records of the actual historical cost of existing general infrastructure assets, governments can
estimate historical cost. They also may limit retroactive application to only those major general infrastructure assets that
were acquired or significantly reconstructed, or that received significant improvements, in fiscal years ending after June
30, 1980.
The above gives you some general information on GASB Statement No. 34 implementation. We intend to educate and
work with all of our clients in developing a plan to implement this new statement. As a result of implementing this
statement, there will no doubt be additional fees for our services. These expected increases will most likely result from
additional time spent in the areas of (1) training, (2) account structure modifications to provide information necessary to
prepare fmancial statements, (3) accounting for fixed assets, infrastructure assets and related depreciation, and (4)
[mancial statement preparation. The more that the City staff can do in the areas of fixed asset accounting and proper
account structure will help in reducing these costs. We will help you as much as possible to accomplish this.
* * * * *
This report is intended solely for the use of management and council. The comments and recommendations in the report are
purely constructive in nature, and should be read in this context.
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.
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 opportunity to be of service and for the courtesy and cooperation extended to us
by your staff.
March 16, 2001
Minneapolis, Minnesota
~) ~J. ! (YJt2f..{>jLLf
ABDO, EICK & MEYERS, LLP
Certified Public Accountants
IT
11-;]