HomeMy WebLinkAbout8A - 1999 Financial Report
MEETING DATE:
AGENDA #:
PREPARED BY:
AGENDA ITEM:
JUNE 5, 2000
8A
RALPH TESCHNER, FINANCE DIRECTOR
CONSIDER APPROVAL OF 1999 ANNUAL FINANCIAL
REPORT AND MANAGEMENT LETTER
DISCUSSION:
Councilmernbers were distributed a copy of the 1999 Financial
Report as prepared by the certified public accountant firm of Abdo,
Abdo, Eick and Meyers. The report was given to you directly to
afford sufficient time to review the document before the June 5th
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 1999.
History
On September 21, 1998 the City Council approved Resolution 98-
105 which authorized the engagement of the Abdo, Abdo and Eick
Company to provide auditing services for the fiscal years of 1998,
1999 and 2000. The cost for their professional services to prepare
the 1999 CAFR (comprehensive annual financial report) was
approved in an amount of$10,885.00.
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 which 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 1999
audit are:
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1.) Actual revenues of $7,601,069 (including transfers in) compared
to budgeted revenues of$7,127,582 or 106.6% of projection.
2.) Operating expenditures were $7,080,634 compared to budgeted
expenditures of7,127,582 or 99.3% of budget.
3.) Gross revenues exceeded expenditures in the amount of
$520,435. This amount was reduced to $195,435, which
automatically becomes part of the General Fund balance, by the
following:
a) $75,000 debt retirement of the old park bonds
b) $100,000 appropriation to the Revolving Equipment Fund
c) $150,000 appropriation to the Collector Street Fund.
Each of these expenditure actions were authorized, by Council
resolution, outside the scope of the general fund operating budget.
The 1999 year-end General Fund balance increased to $2,449,988
which represents a reserve of 33.4% or $249,505 above the council
recognized 30% threshold. 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 even if funds are
available. The second occurrence is that the City received $89,293
for the sale of the Toronto A venue lot which the council did not
program for a specific use and therefore became part of the surplus.
This represented a one time revenue source. Third, building permits
were up 6% and fourth, developers agreement revenue came in at
more than $66,000 above projections. The last two revenue sources
are highly elastic and are difficult to accurately anticipate.
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 TERN A TIVES:
The following alternatives are available to the City Council:
1. Accept 1999 Annual Financial Report and Management Letter
as submitted.
2. Delay action according to specific Council reason.
RECOMMENDATION: Staff would recommend approval of the management letter and the
financial report for the fiscal year ended December 3 I, 1999 as
submitted. A City Financial Reporting form, which is basically a
condensed excerpt of the official document, is required to be
H:\AUDlT\AUDAGEN.DOC
RECOMMENDED
MOTION:
REVIEWED BY:
Attachments:
H.\AUDlT\AUDAGENDOC
'T"'-,r' -n
submitted to the Office of the State Auditor by June 30, 2000 along
with this report.
Please feel free to contact Staff prior to the meeting if you have any
questions. Steve McDonald of the firm Abdo, Abdo, Eick and
Meyers will make a brief presentation regarding the report and
management letter and respond to any questions the council may
have.
the 1999 Annual Financial Report and
March 23, 2000
Certified Public Accountants & Consul/ilnts
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, 1999 and
have issued our report thereon dated March 23, 2000.
Professional standards require that we provide you with the following information related to our audit.
Our Responsibility under 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 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 [mancial 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.
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the tenns 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 fmandal statements. No
new accounting policies were adopted and the application of existing policies was not changed during 1999. 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
II IT
City of Prior Lake
March 23, 2000
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 fmancial statements and
because of the possibility that future events affecting them may differ significantly from those expected.
Significant Audit Adjustments
For 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 auditor's report, We are 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 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.
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 fund balance increased $195,435 to $2,449,988 at December 31, 1999, Overall, revenue was $473,487
above budget and expenditures were below budget by $48,011, Transfers out totaled $1,212,148, We nomJally recommend a
minimum fund balance reserve around 40 to 45% of planned expenditures. This provides adequate working capital until
major revenue sources are received in July, The current year fund balance is 33.08% of 1999 expenditures which is $249,505
above the City's recognized 30% threshold for fund balance reserve, The fund balance in relation to expenditures for the last
three years follows:
Fund Balance
Expenditures as a Percent of
Fund and Expenditures
Balance Transfers out and Transfers
1999 $ 2,449,988 $ 7,405,634 33.08%
1998 2,254,553 6,676,814 33.77
1997 1,815,122 6,490,589 27.96
City of Prior Lake
March 23, 2000
Page Three
Fund balance as a percent of expenditures
~._-----~------------~----~-----_._-_._--
oF,
40.00%
/
./
./
/
20.00%
0.00%
1997
1998
1999
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.
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City of Prior Lake
March 23, 2000
Page Four
A summary of 1999 General Fund revenue and expenditures is as follows:
Budget
Variance -
Favorable
(Unfavorable)
Actual
Revenue
Expenditures and other financing uses
$ 6,927,582
(6,927,582)
$ 473,487
(278.052 )
$ 7,401,069
(7,205,634 )
Excess (Deficiency) of Revenue
Over Expenditures
$
195,435
2,254,553
$ 2.449,988
$ 195.435
Fund Balance, January 1
Fund Balance, December 31
A comparison between 1999 and 1998 revenue is presented below:
Percent Increase
of (Decrease)
Revenue Source 1999 Total 1998 From 1998
Property Taxes $ 3,907,775 51.41 % $ 3,690,789 $ 216,986
Licenses and Permits 480,713 6.32 453,827 26,886
Intergovernmental 1,826,040 24.02 1,820,329 5,711
Charges for Services 739,662 9,73 667,507 72,155
Fines and Forfeits 110,309 1.45 95,024 15,285
Other Revenue 239,838 3,16 83,573 156,265
Interest 96,732 1.27 105,196 (8,464 )
Transfers 200,000 2,64 200,000
Total Revenue $ 7,601.069 100,00% $ 7.116.245 $ 484,824
A graphical presentation of 1999 revenue totals follows:
1999 Revenue
Other Revenue
3.]6%
Taxes
51.4]%
Interest
1.27%
Transfers
2.64%
Fines
].45%
Licenses
6.32%
Intergovernmental
24.02%
Charges for services
9.73%
City of Prior Lake
March 23, 2000
Page Five
A comparison between 1999 and 1998 expenditures is presented below:
Percent Increase
of (Decrease)
Programs 1999 Total 1998 From 1998
General Government $1,553,280 20.97% $1,401,320 $ 151,960
Public Safety
Police 1,604,751 21.67 1,561,072 43,679
Fire 248,308 3,35 204,277 44,03l
Other 271,026 3.66 314,152 (43,126)
Public Works 839,384 11.33 794,548 44,836
Culture and Recreation 1,135,158 15.33 1,030,345 104,813
Other 447,866 6.05 379,173 68,693
Capital Outlay 93,713 1.27 137,463 (43,750)
Transfers to Other Funds 1,212,148 16.37 854,464 357,684
Total Expenditures $7.405.634 lQ.Q.Q.2 % $6,676,814 $ 728.820
A graphical presentation of 1999 expenditures totals by program follows:
1999 Expenditures
Transfers out
16.37%
Capital outlay
1.27%
Other
6.05%
General government
20.97%
Culture and recreation
15.33%
Public works
11.33%
The major line item increase occurred in the Transfers to Other Funds category and is attributed to the following three
actions:
1) $75,000 accelerated debt amortization (bond call) of outstanding 0,0. Park Bond issues,
2) Appropriation by council resolution of$100,000 to Revolving Equipment Fund as a result ofFEMA depreciation
aid factor.
3) Appropriation by council resolution of $150,000 to Collector Street Fund for future intersection upgrades along
Highway 13.
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City of Prior Lake
March 23, 2000
Page Six
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:
Total
Fund Balance
Increase
1999 1998 (Decrease )
$ 531,782 $ 244,511 $ 287,271
209,739 207,007 2,732
60,841 56,830 4,011
4,912 4,912
93,937 18,746 75,191
39,610 39.610
$ 940.821 $ 527.094 $ 413.727
Capital Park
Severance Compensation
EDC Revolving Loan
Revolving Loan
DAG
Cable Franchise
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 Deposits Assets Outstanding
Fire Hall Bonds $ 1,539,495 $ 1,539,495 $ 3,265,000
Sand Point 231,342 233,868 35,000
North Shore 1,262,499 2,251,645 1,225,250
Water Tower 502,309 502,309 659,750
Business Office Park (26%) 659,714 672,254 405,600
Business Office Park (74%) 223,981 329,815 1,154,400
Prior South 102,541 161,671 425,000
Ridgemount 30,064 102,454 620,000
Water Rev. PW Bldg. 1,949,400 1,949,400 3,815,000
Northwood 184,003 330,559 705,000
Pike Lake 107,755 308,894 865,000
Park Referendum 7,040,988 7,040,988 14,790,000
Duluth 238,752 534,856 1,150,000
Candy Cove 157.726 391.022 1 ,025.000
Total $ 14,230.569 $ 16.349.230 $ 30.140.000
City of Prior Lake
March 23,2000
Page Seven
Capital Project Funds
The following funds account for major capital projects:
Fund Fund
Balance Balance Increase
12/31/99 12/31/98 (Decrease )
Tax Increment $ 151,940 $ 114,402 $ 37,538
Revolving Equipment 931,296 969,182 (37,886)
Building 63,538 63,538
Construction 1,181,293 1,100,883 80,410
Trunk Reserve 1,833,446 1,764,364 69,082
Collector Street 1,502,993 1,194,595 308,398
Park Referendum 1,977,410 6,864,333 (4,886,923 )
Tax Increment 2-1 Keyland 4,712 106,086 (101,374 )
Tax Increment 2-2 Becker 24,096 34,866 (10,770)
Tax Increment 2-3 AmerIMetro 7,030 30,634 (23,604 )
Tax Increment 2-4 Conunercial 138,207 111,207 27,000
Tax Increment 2-5 E,M. Prod. 8,706 71,464 (62,758)
Tax Increment 2-6 NBC 26,754 32,976 (6,222 )
Tax Increment 2-7 Award Prin. 1,789 31,587 (29,798)
Tax Increment 2-8 D Hansen 1.892 (340 ) 2.232
Total $ 7.855.102 $ 12.426,239 $ (4 571.137)
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
1999 Revenue 1998 Revenue
Operating revenue
Sewer charges $1,492,977 58,1% $ 1,305,051 58.4%
Water charges 583,385 22.7 523,827 23.4
Other 493.100 19.2 405.899 ~
Total operating revenue 2,569,462 100.0 2,234,777 100.0
Total expenses 1,851.361 72.1 1,768,697 -lil
Operating income $ 718.101 27.9% $ 466.080 12.5%
Cash balance at year end $3,004.276 $ 2.311.190
The current cash balance of$3,004,276 is 162% of 1999 expenses. This is an increase of$693,086 from 1998. The cash
balance is needed to provide working capital and major capital needs. The current margins appear to be generating sufficient
cash flow.
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City of Prior Lake
March 23,2000
Page Eight
Storm Water Utility
The Storm Water Utility results of operations for the past two years are as follows:
Percent of Percent of
1999 Revenue 1998 Revenue
Total revenue $ 163,286 100.0% $ 126,013 100.0%
Total expenses 237.705 145,6% 110,315 ~%
Operating income (loss) $ (74.419) ~%) $ 15,698 12.5%
Cash balance at year end $ 86,188 $ 171.293
The large increase in expenses came in the repair period maintenance category of expenses. Although the cash balance
appears adequate, the City should always 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 fmancial 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 fmancial position at a point in time (like a balance sheet does); the
statement of activities presents its activities during a period (like an operating statement 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 23, 2000
Page Nine
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; dams; 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 1,2 governments need not
retroactively report those assets until calendar year 2006, 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)
fmancial 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.
Capitalization policy
Currently, the City records all assets above $500 as fixed assets. Based on the level of operations, we have recommended the
City should consider raising the limit to $2,000. Because so many smaller items from $500 to $2,000 have a relatively short
life, the City would not be sacrificing any necessary documentation.
Staff concurs and will be implementing this change in 2000.
* * * * *
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.
Olnlo, ~J7J'J !lJlel1ers J LLP
ABDO, ABDO, EICK & MEYERS, Y..LP
Certified Public Accountants
March 23,2000
Minneapolis, Minnesota
II II
{JM
*;1UJffl tM V~ 06 FRANK BOYLES
May 19, 2000
TO: MAYOR AND COUNCILMEMBERS
SUBJECT: Annual Financial Report
Attached you will find the Annual Financial Report for the City for the year ending December
31, 1999. This item is scheduled for consideration at your June 5, 2000 regular meeting. Due
to the length of the report, I am distributing it prior to the agenda package so that you will have
ample time to review the material.
If you have any questions regarding the report, please feel free to call Ralph directly at 447-
9841.
16200 Eagle Creek Ave. S.L Prior Lake. Minnesota .55372-1714 / Ph. (6l2i 447-4230 / Fax (612) 447-4245
c\'. [QI. 'AL OPPC,~i.TI.',,[TY E",IPU JYU,