HomeMy WebLinkAbout10A - 2001 Financial Report
MEETING DATE:
AGENDA #:
PREPARED BY:
AGENDA ITEM:
MAY 20, 2002
10 A
RALPH TESCHNER, FINANCE DIRECTOR
CONSIDER APPROVAL OF 2001 ANNUAL FINANCIAL
REPORT AND MANAGEMENT LETTER
DISCUSSION:
History
Council members were distributed a copy of the 2001 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 20th meeting. The audit was conducted in
accordance with generally accepted auditing standards and
represents an independent opinion of the financial results and status
of the City of Prior Lake during the year of 200 1.
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 2001
audit are:
1.) Actual revenues of$8,754,144 (including transfers in), compared
to budgeted revenues of $7,517,047 or 116% of projection.
2.) Operating expenditures were $7,880,964 compared to budgeted
expenditures of7,517,047 or 105.0% of budget.
3.) Gross revenues exceeded expenditures in the amount of
$873,180.
H: IAUDlTlAgendaaudil.doc
16200 Eagle Creek Ave. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (952) 447-4230 / Fax (952) 447-4245
AN EQUAL OPPORTUNITY EMPLOYER
The 2001 year-end General Fund balance (which is maintained for
cash flow and emergency purposes) increased to $4,354,441 that
represents a reserve of 57% of the 2002 General Fund Budget or
above the council recognized minimum 30% threshold. This level is
more consistent with the auditor's previous recommendation of
50%.
The reserve growth occurred primarily because of three 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 84% of the revenue
increase was attributed to growth related revenues, specifically
building permits and development agreement revenue.
. Third, interest earnings were increased as a result of structuring
investments over longer terms to realize a higher return.
The middle 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 anticipated
expenses including: city hall/satellite fire station, cleanup costs
associated with the old Prior Lake pay dump site, land acquisition
for public purposes and economic project assistance that may be
contemplated.
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 term financial strength.
AL TERNA TIVES:
The following alternatives are available to the City Council:
1. Accept 2001 Annual Financial Report and Management Letter
as submitted.
2. Delay action according to specific Council reason.
RECOMMENDA nON: Staff recommends acceptance of the management letter and the
financial report for the fiscal year ended December 31, 2001 as
submitted. A City Financial Reporting Forn1, 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, 2002 along
with this report.
H: IA UDITlAgendaaudit.doc
RECOMMENDED
MOTION:
REVIEWED BY:
Attachments:
H: IA UDlTlAgendaaudit.doc
Please feel free to contact Staff prior to the meeting if you have any
questions. Steve McDonald of the firm Abdo, Eick and Meyers will
make a brief presentation regarding the report and management
letter and respond to any questions the council may have.
2001 Annual Financial Report and
Motion to accept
Management Letter.
Certified Public Accountants & Consultants
March 21, 2002
7241 Ohms Lane
Suite 200
Edina, MN 55439
Honorable Mayor and City Council
City of Prior Lake
Prior Lake, Minnesota
We have audited the general purpose financial statements of the City of Prior Lake for the year ended December 31, 2001 and
have issued our report thereon dated March 21, 2002. Professional standards require that we provide you with the following
information related to our audit.
Our Responsibility Under Generally Accepted Auditing Standards in the United States of America 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 general purpose financial statements are free of material misstatement and
are fairly presented in accordance with accounting principles generally accepted in the United States of America. Because an audit
is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all
transactions, there is a risk that material errors, fraud, or 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.
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 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 non-compliance with the material provisions of laws,
regulations, contracts and grants.
Accounting Estimates
Accounting estimates are an integral part of the general purpose financial 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.
Audit Adjustments
For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the combined financial
statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment mayor
may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future financial
statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by
the City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's financial
reporting process.
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to
our satisfaction, concerning a financial accounting, reporting or auditing matter that could be significant to the general-purpose
financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our
audit.
952.835.9090 Fax 952.835.3261
www.aemcpas.com
City of Prior Lake
March 21, 2002
Page Two
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 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.
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.
City of Prior Lake
March 21, 2002
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 $873,180 to $4,354,441 at December 31,2001. We nonna11y recommend a minimum fund
balance reserve around 50 percent of planned expenditures. The City has a policy to maintain a reserve of at least 30 percent of
planned expenditures in fund balance. So at the current level, the fund balance is within an acceptable range of what is
recommended. The State has recently indicated they may consider reviewing fund balance reserves of local governments. Since
levy limits have been implemented in the past, it is possible that consideration of reserves may playa part in levy limits set in
future legislative sessions. This may negatively impact the City if reserves in excess of the amount needed for working capital
are not designated. A designation indicates intended use of fund balance and the City has done a good job in identifying
planned uses of reserves through designations. 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
II Expenditures
o Fund balance
II Fund balance as a percent
1999
$7,405,634
$2,449,988
33.08%
2000
$7,258,361
$3,481,261
47.96%
2001
$7,880,964
$4,354,441
55.25%
Some of the purposes and benefits of maintaining an adequate fund balance are as follows:
Purooses 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 fonnulas 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 21, 2002
Page Four
A summary of 2001 General Fund revenue and expenditures is as follows:
Variance -
Favorable
Budget Actual (Unfavorable )
Revenue $ 7,292,047 $ 8,529,144 $ 1,237,097
Expenditures 6,791,562 7,155,479 (363,917 )
Other financing sources (uses)
Operating transfers in 225,000 225,000
Operating transfers out (725 .485 ) (725.485 )
Excess of revenue and other sources over expenditures
and other uses $ 873,180 $ 873.180
Fund balance, January 1 3.481.261
Fund balance, December 31 $ 4.354.441
The total positive variance in revenue was 17 percent of the revenue budget. The majority of this variance came from
one-time windfalls or growth related income. The three largest revenue line items with variances are Nonbusiness
Licenses ($340,946 variance), Developer's Agreements ($293,455 variance) and Plan Check Fees ($159,320 variance).
The majority (87 percent) of the expenditure variance resulted from the acquisition of property under the economic
development category. Pages 26 through 30 of the annual financial report lists all categories of revenue compared with
budget. All of the significant items were discussed in the Finance Director's year end report.
City of Prior Lake
March 21, 2002
Page Five
A comparison between 2001 and 2000 revenue is presented below:
Percent Percent Increase
of of (Decrease)
Revenue Source 2001 Total 2000 Total from 2000
Property Taxes $ 3,980,518 45.47 % $ 4,101,962 49.48% $ (121,444)
Licenses and Permits 793,486 9.06 549,729 6.63 243,757
Intergovernmental 1,803,029 20.60 1,933,628 23.33 (130,599)
Charges for Services 1,021,918 11.67 725,391 8.75 296,527
Fines and Forfeits 104,988 1.20 107,091 1.29 (2,103 )
Other Revenue 615,982 7.04 471,047 5.68 144,935
Interest 209,223 2.39 200,786 2.42 8,437
Transfers 225.000 2.57 200.000 2.42 25.000
Total Revenue and Transfers $ 8.754.144 100.00% $ 8.289.634 10000% $ 464.510
A graphical presentation of 2001 revenue totals follows:
2001 Revenue
Property Taxes
45.47%
Transfers
2.57%
Interest
2.39%
Licenses and Permits
9.06%
Other Revenue
7.04%
Fines and Forfeits
1.20%
Charges for Services
11.67%
Intergovernmental
20.60%
City of Prior Lake
March 21,2002
Page Six
A comparison between 2001 and 2000 expenditures is presented below:
Percent Percent Increase
of of (Decrease)
ProgramS 2001 Total 2000 Total from 2000
General Government $ 1,567,247 19.89% $ 1,624,061 22.38% $ (56,814 )
Public Safety
Police 1,754,530 22.26 1,639,912 22.59 114,618
Fire 283,141 3.59 257,976 3.55 25,165
Other 326,205 4.14 294,897 4.06 31,308
Public Works 897,749 11.39 854,566 11.77 43,183
Culture and Recreation 1,268,473 16.10 1,219,239 16.80 49,234
Other 609,751 7.74 430,023 5.92 179,728
Capital Outlay 448,383 5.69 221,350 3.05 227,033
Transfers to Other Funds 725.485 9.20 716.337 9.88 9.148
Total Expenditures and Transfers $ 7.880.964 100.00% $ 7.258 361 100.00% $ 622.603
A graphical presentation of 2001 expenditures totals by program follows:
2001 Expenditures
General Government
19.89010
Transfers to Other
Funds
9.20%
Other
7.74%
Public Safety
29.99%
Capital Outlay
5.69%
Public Works
11.39%
City of Prior Lake
March 21, 2002
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 Increase
2001 2000 (Decrease )
Capital Park $ 1,323,185 $ 1,165,492 $ 157,693
Severance Compensation 74,801 149,457 (74,656 )
EDC Revolving Loan 69,824 64,656 5,168
Revolving Loan 19,505 11,888 7,617
DAG 448,569 250,515 198,054
Cable Franchise 82,466 107,307 (24,841 )
EDA 29.848 29.068 780
Total $ 2.048.198 $ 1.778.383 $ 269.815
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 Maturity
Cash Assets Outstanding Date
Fire Hall Bonds $ - $ - $ 1,570,000 2013
North Shore 969,286 1,872,415 845,000 2006
Water Tower 764,341 768,541 455,000 2006
Water Rev. PW Bldg. 218,626 218,626 1,785,000 2014
Pike Lake 148,172 254,081 665,000 2007
Park Referendum 7,029,218 7,029,218 14,525,000* 2017
Duluth 236,525 435,306 900,000 2008
Candy Cove 189,578 343,922 850,000 2009
Oak Ridge 197,421 483,698 1,025,000 2010
2001 G.O. Refunding 1,661,699 1,856,707 2,195,000 2006
Frog Town 200.231 501.609 1.035.000 2011
Total $ 11.615.097 $ 13.764.123 $ 25.850.000
* Includes escrow to provide for prepayment of 1997 Park Bonds totaling $7,025,000 on December 1,2003.
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.
City of Prior Lake
March 21, 2002
Page Eight
Capital Project Funds
The following funds account for major capital projects:
Fund Fund
Balance Balance Increase
12/31/01 12/31/00 (Decrease )
Tax Increment $ 288,381 $ 260,097 $ 28,284
Revolving Equipment 620,935 802,634 (181,699)
Building 67,545 67,545
Construction 1,000,904 1,100,179 (99,275 )
Trunk Reserve 2,611,969 2,453,127 158,842
Collector Street 1,893,393 1,687,745 205,648
Park Referendum 274,950 372,703 (97,753 )
Tax Increment 2-1 Keyland 584 3,584 (3,000 )
Tax Increment 2-2 Becker 736 3,623 (2,887 )
Tax Increment 2-3 Amer/Metro 105 3,710 (3,605 )
Tax Increment 2-4 Commercial 184,745 162,737 22,008
Tax Increment 2-5 E.M. Prod. 512 3,812 (3,300 )
Tax Increment 2-6 NBC 190 3,116 (2,926 )
Tax Increment 2-7 Award Prin. 25,024 864 24,160
Tax Increment 2-8 D Hansen 457 165 292
Total $ 6.970.430 $ 6.925.641 $ 44.789
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:
2001
Percent of Percent of
Total Total
Revenue 2000 Revenue
51.7% $ 1,585,450 56.0%
27.6 768,890 27.2
20.7 474.135 16.8
100.0 2,828,475 100.0
70.1 1.859.910 65.8
29.9% $ 968,565 34.2%
12.4 311,221 11.0
(17.4) (484.611 ) (17.1)
..2A.2 % $ 795.175 2.8..J. %
$ 4.094.759
Operating revenue
Sewer charges
Water charges
Other
Cash balance at year end
$ 1,553,770
829,978
620.457
3,004,205
2.104.474
$ 899,731
371,896
(524.736 )
$ 746.891
$ 5.259.978
Total operating revenue
Total expenses
Operating income
Nonoperating revenue
Operating transfers out
Net income
After operating transfers in the form of a budgeted general fund contribution and revenue bond payment transfer, a net income of
$746,891 was realized in 2001. 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. The difference in cash balance from 2000 is due to net income plus changes in non-cash items on the balance sheet. The
largest non-cash item is usually depreciation, which was nearly $390,000 in 2001.
City of Prior Lake
March 21, 2002
Page Nine
Storm Water Utility
The Storm Water Utility results of operations for the past two years are as follows:
Percent of Percent of
Total Total
2001 Revenue 2000 Revenue
Total revenues 159,686 100.0 % 153,262 100.0
Total expenses 216.236 135.5 102.700 67.0
Operating income (56.550 ) (35.4) 50.562 33.0
Nonoperating revenue 35,588 22.3 11 ,225 7.3
Operating transfers in (out) (52.600) -.lR2) 21.889 ---1U
Net income (loss) $ (73 562) ~)% $ 83.676 --5ti %
Cash balance at year end $ 10 1.236 $ 182.134
The large increase in expenses came in the capital improvement category of expenses, which included close out of projects carried
over from the prior year. 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
We have discussed GASB 34 in detail in our management letter each of the last two years. This statement is a major overhaul in
the way government financial statements look and the information contained within. It is intended to make the City's annual
financial report more user friendly for citizens, staff, council and those that provide resources to the City. We are prepared to
offer assistance and direction on implementation but staff and council can find many resources relating to Statement #34 on
GASB's web site (http://accounting.rutgers.eduJraw/gasb/repmodellindex.htrnl). We have discussed some of the items needing
preparation in advance of implementation with your Finance Director and listed below are some key dates and activities:
Statement implementation date:
Items needing completion by City:
Infrastructure asset inventory:
Capital asset inventory:
Management Discussion and Analysis Letter (MD&A):
Year ending, December 31, 2004
Year ending, December 31, 2003
Year ending, December 31,2003
Year ending, December 31, 2004
These are recommended timelines for completion but the City can complete any of them before the date identified.
* * * * *
This information is intended solely for the use of management, Council and the Office of the State Auditor and is not intended to
be and should not be used by anyone other than these specified parties. 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 21, 2002
Minneapolis, Minnesota
~J lrJt 1 m~ J LLP
ABDO, EICK & MEYERS, LLP
Certified Public Accountants