HomeMy WebLinkAbout10A Management LetterManagement Report
for
City of Prior Lake, Minnesota
December 31, 2012
AUDIT SUMMARY
The following is a summary of our audit work, key conclusions, and other information that we consider
important or that is required to be communicated to the City Council, administration, or those charged
with governance of the City.
RUASGAU
O
URESPONSIBILITY NDERUDITING TANDARDS ENERALLY CCEPTED IN THE NITED
SA
GAS
OVERNMENTUDITING TANDARDS
TATES OF MERICA AND
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 as of and for the year ended
December 31, 2012 and the related notes to the financial statements. Professional standards require that
we provide you with information about our responsibilities under auditing standards generally accepted in
the United States of America, Government Auditing Standards, as well as certain information related to
the planned scope and timing of our audit. We have communicated such information to you verbally and
in our audit engagement letter. Professional standards also require that we communicate the following
information related to our audit.
STA
P
LANNEDCOPE AND IMING OF THE UDIT
We performed the audit according to the planned scope and timing previously discussed and coordinated
in order to obtain sufficient audit evidence and complete an effective audit.
OF
A
UDITPINION AND INDINGS
Based on our audit of the City’s financial statements for the year ended December 31, 2012:
We have issued an unqualified opinion on the City’s financial statements.
We reported no deficiencies in the City’s internal control over financial reporting that we
considered to be material weaknesses.
The results of our testing disclosed no instances of noncompliance required to be reported under
Government Auditing Standards.
We reported no findings based on our testing of the City’s compliance with Minnesota laws and
regulations.
F-UPYFR
OLLOWP ON RIOREARINDINGS AND ECOMMENDATIONS
As a part of our audit of the City’s financial statements for the year ended December 31, 2012, we
performed procedures to follow-up on the findings and recommendations that resulted from the prior year
audit. We reported the following findings that were corrected by the City in the current year:
In the fiscal 2011 audit report, a prior period adjustment was noted to fairly state the City’s
capital assets and net position. As part of our audit for the year ended December 31, 2012, we
noted that the City has properly accounted for and reported their capital assets.
In the fiscal 2011 audit report, an adjusting journal entry was needed to fairly state the financial
statements. As part of our audit for the year ended December 31, 2012, we noted the City
implemented controls to ensure all account balances have been properly adjusted in order to fairly
state the financial statements.
In the prior year, the City did not meet the requirements for obtaining a withholding affidavit
certificate before making final settlement with contractors. We did not have any findings of this
nature in the current year.
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In the prior year, the City did not meet the requirements for a prompt payment of bills within a
standard payment period of 35 days from the receipt of goods and services for governing boards
that meet at least once a month. We did not have any findings of this type in the current year.
In the prior year, the City did not meet the requirements for proper claims declaration for
disbursements. We did not have any findings of this nature in the current year.
In the prior year, we reported that a mutual fund the City invested in during fiscal 2011 was not
rated in one of the two highest rating categories for mutual funds by at least one nationally
recognized statistical rating organization. During this year’s audit testing, it was noted that the
City no longer invests with this mutual fund.
SAP
IGNIFICANT CCOUNTING OLICIES
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 of the notes to basic financial statements.
For the fiscal year ended December 31, 2012, the City implemented Governmental Accounting Standards
Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred
Inflows of Resources, and Net Position. This statement changed how governmental entities present a
statement of net position, adding two new basic financial statement elements, and replacing “net assets”
with “net position” as the terminology used to describe the difference between the other four elements.
The two basic financial statement elements added are “deferred inflows of resources” and “deferred
outflows of resources.” These new elements are differentiated from assets (deferred outflows of
resources) and liabilities (deferred inflows of resources), but have similar effects on net position.
We noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in
the proper period.
AEMJ
CCOUNTING STIMATES AND ANAGEMENT UDGMENTS
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 assumptions 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. The most sensitive estimates affecting the financial statements were:
Depreciation
– Management’s estimates of depreciation expense are based on the estimated
useful lives of the assets.
Compensated Absences
– Estimates for compensated absences payable are based on current sick
and vacation leave balances.
We evaluated the key factors and assumptions used to develop these accounting estimates in determining
that they are reasonable in relation to the basic financial statements taken as a whole. The financial
statement disclosures are neutral, consistent, and clear.
CUM
ORRECTED AND NCORRECTEDISSTATEMENTS
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.
We proposed one uncorrected audit adjustment to the financial statements for the City not reporting its
liability for other post-employment benefits totaling $173,454. Management has determined that the
effects of this item are immaterial, both individually and taken together, to the government-wide
liabilities.
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DEPA
IFFICULTIES NCOUNTERED IN ERFORMING THE UDIT
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
DWM
ISAGREEMENTSITHANAGEMENT
For purposes of this report, professional standards define a disagreement with management as a financial
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.
MR
ANAGEMENTEPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 20, 2013.
MCWOIA
ANAGEMENTONSULTATIONS ITH THERNDEPENDENTCCOUNTANTS
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 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.
OAFI
THERUDIT INDINGS OR SSUES
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.
OIDCAFS
THERNFORMATION IN OCUMENTSONTAININGUDITEDINANCIAL TATEMENTS
Our audit was conducted for the purpose of forming opinions on the financial statements that collectively
comprise the City’s basic financial statements. Other information, including the introductory section,
supplemental information, and other information section accompanying the basic financial statements are
presented for purposes of additional analysis and are not required parts of the basic financial statements.
With respect to the supplemental information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content, and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period, and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplemental information to the underlying accounting records used to prepare the basic
financial statements or to the basic financial statements themselves.
With respect to the introductory section and the other information section accompanying the financial
statements, our procedures were limited to reading this other information, and in doing so we did not
identify any material inconsistencies with the audited financial statements.
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FUNDING CITIES IN MINNESOTA
L
EGISLATION
The 2011 Legislative Session was very long and difficult. It featured a large budget deficit and a very
contentious battle between the Democratic Governor and the Republican-led House and Senate; and
resulted in numerous vetoes, a special session, and the longest shutdown of non-essential state
government services in Minnesota history.
The outlook going into the 2012 Legislative Session was brightened somewhat by positive economic
news. The November 2011 financial forecast projected a surplus of $876 million in the state general fund
for the biennium ending June 30, 2013, later revised to a surplus of almost $1.2 billion in the
February 2012 forecast. This meant that the Legislature would not have to pass a “supplemental budget”
to deal with projected shortfalls for the second half of the biennium, as was the case in the previous short
session.
The positive feeling was short-lived, however, as the 2012 Legislative Session quickly degenerated into
more partisan squabbling. Once again, the Governor exercised his veto power a number of times to block
Republican legislative initiatives. The Republican Legislature reacted by introducing several potential
amendments to the state constitution, which once passed would be subject to a public vote and could not
be vetoed by the Governor. Two potential amendments, addressing voter identification and the legal
definition of marriage, made it on the ballot for the November 2012 election and were voted down by the
public. In the end, the main accomplishment of the session was a hard-fought compromise on partial
public funding for a Vikings stadium.
The 2012 Legislature did pass a state bonding bill, a technical tax bill (after two omnibus tax bills were
vetoed), and a few other bills that impacted Minnesota cities. The following is a summary of recent
legislative activity affecting the finances of Minnesota cities in 2012 and into the future:
Local Government Aid (LGA)
– The state-wide LGA appropriation for fiscal 2012 was
$425.2 million. For fiscal 2012, cities received the lesser of their 2010 actual or 2011 certified
LGA allocations. For fiscal 2013 and beyond, the state-wide LGA appropriation had been set to
increase to $426.4 million; however, the 2012 Legislature made some changes. LGA payments for
2013 are frozen at 2012 levels for cities with a population of 5,000 or more. For cities with
populations below 5,000, 2013 LGA will be the greater of their 2012 aid or the amount they would
have received for 2013 under existing law. The Legislature also froze the base for calculating the
maximum increases and decreases for a city’s 2013 and 2014 LGA to their 2012 aid. Beginning in
2015, the previous year’s LGA payment will be used to calculate the minimum and maximum
increases.
Market Value Homestead Credit (MVHC) –
The 2011 Legislature eliminated the MVHC
reimbursement program beginning in fiscal 2012. Rather than receiving a property tax credit,
qualifying homeowner taxpayers had a portion of the market value of their house excluded from their
taxable market value. This new system provides homeowners property tax relief by shifting a portion
of their potential tax burden to other property classifications, rather than directly reducing their taxes
through a state paid tax credit reimbursement. While this new homestead exclusion is calculated in a
similar manner to the repealed MVHC, the actual tax relief to individual homeowner taxpayers varies
depending on the makeup of the taxing jurisdictions that levy on their particular property.
Depositories Authorized to Redeposit City Funds
– Banks designated as depositories of city funds
are authorized to redeposit the funds in another bank, savings and loan, or credit union located within
the United States, provide the redeposited funds are fully covered by federal depository insurance
(FDIC or NCUA). This law change was enacted to make additional federal depository insurance
available to cover municipal deposits in anticipation of the December 31, 2012 sunset of the
temporary unlimited coverage for non-interest bearing municipal accounts provisions of the
Dodd-Frank Act.
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Municipal State Aid (MSA) Eligibility
– Three changes were made that protect the MSA of cities
dropping below a population of 5,000, which is the eligibility threshold for receiving MSA for street
maintenance. Under previous law, if a city that formerly had a population of 5,000 or more fell below
a 5,000 population at the 2010 decennial census, it would have been ineligible for MSA beginning in
fiscal 2012. The first change enacted allows previously eligible cities falling below 5,000 population
at a decennial census to continue to be considered to have a population of 5,000 for purposes of
calculating MSA, thereby remaining eligible, until the end of the fourth year of the decade. The
second change enacted states that for purposes of calculating MSA, which is based 50 percent on
population, a city is deemed to have a population equal to the greater of 5,000 or as otherwise
determined by statute. The final change requires that, for 2013 MSA only, the aid be allocated in a
manner that backfills the MSA cities lost in 2012 due to population drops.
Contractor Bond Threshold
– The threshold at which a municipality is required to obtain contractor
performance and payment bonds for public construction contracts was increased from $75,000 to
match the current competitive bid law threshold of $100,000.
Municipal Detachment of Parcels
– A number of corrections and clarifications were made related to
petitions for the detachment of parcels from a municipality. The changes affect petition requirements,
the hearing process, and the sharing of associated hearing and mediation costs with the landowners.
Tort Liability Limits for Cities Contracting With Certain Nonprofits
– The liability limit on
claims against cities involving nonprofit organizations that are engaged in or administer outdoor
recreational activities that are funded or authorized by a municipality were lowered from $1.5 million
to $1.0 million.
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T
P
ROPERTYAXES
Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In
recent years this dependence has been heightened due to reductions in state aids and fees from new
development due to the struggling economy. As a result, many cities have repeatedly been faced with the
difficult choice of either reducing services or increasing taxes on their already overburdened constituents.
Property values within Minnesota cities experienced average decreases of 5.7 percent and 8.8 percent for
taxes payable in 2011 and 2012, respectively, as market values have continued to slide despite recent
signs of improvement in other areas of the economy. In comparison, the City’s taxable market value
decreased 4.1 percent for taxes payable in 2011 and decreased 5.2 percent for taxes payable in 2012. The
market value for taxes payable in 2012 is based on estimated values as of January 1, 2011.
The following graph shows the City’s changes in taxable market value over the past 5 years:
Taxable Market Value
$2,500,000,000
$2,000,000,000
$1,500,000,000
$1,000,000,000
$500,000,000
$–
20082009201020112012
The 2012 data reflects the legislative change which eliminated the MVHC program and replaced it with a
Market Value Exclusion program.
Tax capacity is considered the actual base available for taxation. It is calculated by applying the state’s
property classification system to each property’s market value. Each property classification, such as
commercial or residential, has a different calculation and uses different rates. Consequently, a city’s total
tax capacity will change at a different rate than its total market value, as tax capacity is affected by the
proportion of the City’s tax base that is in each property classification from year-to-year, as well as
legislative changes to tax rates. The City’s tax capacity decreased 4.0 percent and 5.7 percent for taxes
payable in 2011 and 2012, respectively.
The following graph shows the City’s change in tax capacities over the past 5 years:
Local Net Tax Capacity
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$–
20082009201020112012
The 2012 data reflects the legislative change which eliminated the MVHC program and replaced it with a
Market Value Exclusion program.
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The following table presents the average tax rates applied to city residents for each of the last two levy
years, along with comparative state-wide and metro area rates. The general increase in rates reflects both
the increased reliance of local governments on property taxes and the recent decline in tax capacities.
Rates expressed as a percentage of net tax capacity
City of
All CitiesSeven-County
State-WideMetro AreaPrior Lake
201120122011201220112012
Average tax rate
29.730.7
City42.5 46.3 40.0 43.4
38.835.5
County43.7 46.8 42.1 45.0
School25.2 27.3 26.8 28.5 34.434.0
Special taxing6.4 6.8 8.1 8.7 6.86.4
Total117.8 127.2117.0125.6106.6109.7
The City’s portion of the total tax rate is below both the state-wide and metro area averages as presented
in the table above. The school rate within the City exceeds the state-wide and the metro area averages.
The average tax rate in total is below these averages.
As seen in the table above, the City’s average tax rate in 2012 increased from fiscal 2011, mainly due to
increased tax rates from the County.
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GOVERNMENTAL FUNDS OVERVIEW
This section of the report provides you with an overview of the financial trends and activities of the City’s
governmental funds, which includes the General, special revenue, debt service, and capital project funds.
These funds are used to account for the basic services the City provides to all of its citizens, which are
financed primarily with property taxes. The governmental fund information in the City’s financial
statements focuses on budgetary compliance, and the sufficiency of each governmental fund’s current
assets to finance its current liabilities.
GFB
OVERNMENTAL UNDALANCES
The following table summarizes the changes in the fund balances of the City’s governmental funds during
the year ended December 31, 2012, presented both by fund balance classification and by fund:
Governmental Funds Change in Fund Balance
Fund Balance
as of December 31,
Increase
(Decrease)
20122011
Fund balances of governmental funds
Total by classification
$ 8,842,0476,193,184$ (2,648,863)$
Restricted
Assigned8,608,145 6,881,166 1,726,979
Unassigned6,281,156 7,011,612 (730,456)
$ 22,734,82521,082,485$ (1,652,340)$
Total – governmental funds
Total by fund
General6,972,362$ 7,747,207$ (774,845)$
Debt Service5,398,362 5,646,673 (248,311)
Construction Service975,938 3,402,164 (2,426,226)
Special Revenue 1,513,435 1,221,870 291,565
Capital Projects6,222,388 4,716,911 1,505,477
$ 22,734,82521,082,485$ (1,652,340)$
Total – governmental funds
In total, the fund balances of the City’s governmental funds decreased by $1,652,340 during the year
ended December 31, 2012. Fund balances assigned for construction decreased $2,426,226, mainly due to
further completion of the Arcadia and Boudins Phase II projects.
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GFRAE
OVERNMENTAL UNDS EVENUENDXPENDITURES
The following table presents the per capita revenue of the City’s governmental funds for the past three
years, along with state-wide averages.
We have included the most recent comparative state-wide averages available from the Office of the State
Auditor to provide a benchmark for interpreting your City’s data. The amounts received from the typical
major sources of governmental fund revenue will naturally vary between cities based on factors such as
the City’s stage of development, location, size and density of its population, property values, services it
provides, and other attributes. It will also differ from year-to-year due to the effect of inflation and
changes in the City’s operation. Also, certain data on these tables may be classified differently than how
they appear on the City’s financial statements in order to be more comparable to the state-wide
information, particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report using per capita data in order to better identify
unique or unusual trends and activities of your city. We intend for this type of comparative and trend
information to complement, rather than duplicate, information in the Management’s Discussion and
Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population
count, which for most years is based on estimates.
Governmental Funds Revenue per Capita
With State-Wide Averages by Population Class
State-WideCity of Prior Lake
YearDecember 31, 2011
201020112012
Population2,500–10,00010,000–20,00020,000–100,00022,79623,01023,010
Property taxes390$ 363$ 406$
$ 430439$ 413$
Tax increments40 48 51 2122 21
Franchise and other taxes27 36 30 2726 27
Special assessments70 56 56 2937 27
Licenses and permits23 21 31 1918 28
Intergovernmental revenues283 263 152
6194 162
Charges for services95 79 78 6871 116
Other65 75 65 4037 56
Total revenue993$ 941$ 869$ $ 695744$ 850$
In total, the City’s governmental fund revenues for 2012 were $19,549,504, an increase of $3,558,629
(22.3 percent) from the prior year. On a per capita basis, the City received $850 in governmental fund
revenue for 2012, an increase of $155 from the prior year. In general, the City has generated less
governmental fund revenue per capita than the state-wide averages. Most of this relates to lower than
average revenues in many of the development categories including tax increment, special assessments,
and licenses and permits. The City decreased the average property tax revenue per capita from the prior
year, due mostly to the increased and higher than average intergovernmental revenue, the majority of
which comes from the state of Minnesota.
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The expenditures of governmental funds will also vary from state-wide averages and from year-to-year,
based on the City’s circumstances. Expenditures are classified into three types as follows:
Current
– These are typically the general operating type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
Capital Outlay and Construction
– These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year-to-year. Many of these expenditures are
project-oriented, and are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
Debt Service
– Although the expenditures for debt service may be relatively consistent over the
term of the respective debt, the funding source is the important factor. Some debt may be repaid
through specific sources such as special assessments or redevelopment funding, while other debt
may be repaid with general property taxes.
The City’s expenditures per capita of its governmental funds for the past three years, together with
state-wide averages, are presented in the following table:
Governmental Funds Expenditures per Capita
With State-Wide Averages by Population Class
City of Prior Lake
State-Wide
201020112012
YearDecember 31, 2011
Population2,500–10,00010,000–20,00020,000–100,00022,79623,01023,010
Current
General government$ 99126$ 82$ $ 9891$ 106$
187177 191
Public safety 225231 238
7976 74
Streets and highways 108114 89
7571 74
Culture and recreation 9679 87
All other 8174 82 42 8
$ 443417$ 453$
$ 609624$ 578$
Capital outlay
and construction258$ 272$ 233$ $ 169205$ 361$
Debt service
$ 123118$ 144$
Principal$ 148186$ 109$
Interest and fiscal charges 4860 41 7270 65
$ 196246$ 150$ $ 195188$ 209$
Total expenditures in the City’s governmental funds for 2012 were $23,534,869, an increase of
$4,986,257 (27 percent) from the prior year. On a per capita basis, the City expended a total of $1,023 in
2012. Operating expenditures increased $10 per capita. Increases were spread across several functions in
the current year, with the largest increase occurring in general government costs. Capital outlay
expenditures increased $192 per capita from the prior year due to increased street construction and
equipment replacement expenditures. Debt service expenditures for 2012 were $14 per capita higher than
the prior year, mainly due to an increase in bond maturities.
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GF
ENERALUND
The City’s General Fund accounts for the financial activity of the basic services provided to the
community. The primary services included within this fund are the administration of the municipal
operation, police and fire protection, building inspection, streets and highway maintenance, and culture
and recreation. The graph below illustrates the change in the General Fund financial position over the last
five years. We have also included a line representing annual expenditures and operating transfers out to
reflect the change in the size of the General Fund operation over the same period.
General Fund Financial Position
Year Ended December 31,
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$–
20082009201020112012
Fund BalanceCash and Investments BalanceExpenditures and Transfers Out
The City’s General Fund cash and investments balance at December 31, 2012 was $7,637,259, a decrease
of $457,806. Total fund balance at December 31, 2012 was $6,972,362, which is a decrease of $774,845
from the prior year.
As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels
as the volume of financial activity has grown. This is an important factor because a government, like any
organization, requires a certain amount of equity to operate. A healthy financial position allows the City
to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the
adequate and consistent funding of services, repairs, and unexpected costs; and is a factor in determining
the City’s bond rating and resulting interest costs. Maintaining an adequate fund balance has become
increasingly important given the fluctuations in state funding for cities in recent years.
The City adopted a fund balance policy which establishes that the City will strive to maintain an
unrestricted General Fund balance (which includes committed, assigned, and unassigned classifications)
of 45 percent of the subsequent year’s General Fund budgeted expenditures. At December 31, 2012, the
unrestricted fund balance of the General Fund was 57 percent of the subsequent year’s budgeted
expenditures.
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The following chart reflects the City’s General Fund revenue sources for 2012 compared to budget:
General Fund Revenue
Budget and Actual
All Other
Fines and Forfeits
Charges for Services
Intergovernmental
Licenses and Permits
Taxes
ActualBudget
General Fund revenue for 2012 was $12,536,576, which was $841,403 (7.2 percent) more than budget.
Licenses and permits and charges for services were $290,318 and $126,021, respectively, over budget
mainly due to the City having more permits issued than projected. Other income was $249,735 more than
budget, mainly due to income from developer agreements and insurance dividends that are not included in
the approved budget.
The following graph presents the City’s General Fund revenue by source for the last five years. The
graph reflects the City’s increased reliance on property tax revenue in recent years.
General Fund Revenue by Source
Year Ended December 31,
$10,000,000
$9,000,000
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$–
TaxesLicensesIntergovernmentalChargesFinesAll Other
andforand
PermitsServicesForfeits
20082009201020112012
Total General Fund revenue for 2012 was $42,467 (0.3 percent) higher than last year. Property tax
revenue decreased by $324,769, or 3.8 percent. This was mainly offset by licenses and permit revenue
increasing $192,488 due to increased development.
-12-
The following graphs illustrate the components of General Fund spending for 2012 compared to budget:
General Fund Expenditures
Budget and Actual
General Government
Public Safety
Public Works
Culture and Recreation
All Other
ActualBudget
Total General Fund expenditures for 2012 were $10,522,193, which was $299,545 (2.8 percent) under
budget. General Government expenditures were $106,460 under budget due mostly to budget savings in
the areas of technology and legal services. Public Works expenditures were $87,382 under budget due to
fewer street maintenance costs than budgeted. Culture and recreation experienced budget savings of
$62,102 across various departments.
The following graph presents the City’s General Fund expenditures by function for the last five years:
General Fund Expenditures by Function
Year Ended December 31,
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$–
GeneralPublic SafetyPublic WorksCulture andAll Other
GovernmentRecreation
20082009201020112012
Total General Fund expenditures for 2012 were $124,471 (1.2 percent) higher than the previous year.
General Government and public safety expenditures increased by $198,966 and $76,085, respectively,
due mostly to increased personnel services. However, public works expenditures were $105,280 less than
prior year due to lower repair and maintenance costs for both streets and equipment.
ISF
NTERNALERVICEUND
During the year ended December 31, 2011, the City established a Compensated Absences Internal Service
Fund to finance the compensated absence obligations of the governmental funds of the City. At
December 31, 2012, this fund had assets totaling $600,255 while liabilities totaled $895,822, leaving a
deficit net position balance of ($295,567). We recommend that the City continue to include the financing
of these obligations as part of its long range financial plans.
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ENTERPRISE FUNDS OVERVIEW
The City maintains a number of enterprise funds to account for services the City provides that are
financed primarily through fees charged to those utilizing the service. This section of the report provides
you with an overview of the financial trends and activities of the City’s enterprise funds, which includes
the Water, Sewer, Water Quality, and Transit funds.
EFP
NTERPRISEUNDS FINANCIAL OSITION
The following table summarizes the changes in the financial position of the City’s enterprise funds during
the year ended December 31, 2012, presented by both classification and by fund:
Enterprise Funds Change in Financial Position
Net Position
as of December 31,Increase
(Decrease)
20122011
Net position of enterprise funds
Total by classification
Net investment in capital assets45,764,121$ 45,435,153$ 328,968$
Unrestricted7,332,348 6,980,909 351,439
$ 52,416,06253,096,469$ 680,407$
Total – enterprise funds
Total by fund
Water30,776,518$ 30,067,707$ 708,811$
Sewer19,954,061 19,882,718 71,343
Water Quality787,256 771,146 16,110
Transit1,578,634 1,694,491 (115,857)
$ 52,416,06253,096,469$ 680,407$
Total – enterprise funds
In total, the net position of the City’s enterprise funds increased by $680,407 during the year ended
December 31, 2012, mostly due to the improved financial results in the Water Fund.
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WEF
ATERNTERPRISE UND
The following graph presents three years of comparative operating results for the City’s Water Fund:
Water Enterprise Fund
Year Ended December 31,
$3,500,000
$3,250,000
$3,000,000
$2,750,000
$2,500,000
$2,250,000
$2,000,000
$1,750,000
$1,500,000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$–
201020112012
Operating RevenueOperating Expenses
Operating Income (Loss)Income Before Depreciation
The Water Fund ended 2012 with net position of $30,776,518, an increase of $708,811 from the prior
year. Of this, $27,759,603 represents the investment in capital assets, leaving $3,016,915 in unrestricted
net position. The Water Fund had transfers out totaling $1,514,830 in fiscal 2012 to support other funds,
pay debt service, and provide for construction projects.
Operating revenue in the Water Fund was $3,416,383, an increase of 36.4 percent from the prior year.
This increase was due to a combination of increased rates and an increase in water consumption in fiscal
2012 of approximately 17 percent.
Water Fund operating expenses for 2012 were $2,050,863, a decrease of $76,058 (3.6 percent) from the
previous year. The largest factor contributing to the change was a decrease in repairs and maintenance of
$85,269.
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SEF
EWERNTERPRISE UND
The following graph presents three years of comparative operating results for the City’s Sewer Fund:
Sewer Enterprise Fund
Year Ended December 31,
$2,500,000
$2,250,000
$2,000,000
$1,750,000
$1,500,000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$–
$(250,000)
201020112012
Operating RevenueOperating Expenses
Operating Income (Loss)Income Before Depreciation
The Sewer Fund ended 2012 with net position of $19,954,061, an increase of $71,343 from the prior year.
Of this, $17,412,391 represents the City’s investment in capital assets, leaving $2,541,670 in unrestricted
net position. The Sewer Fund had transfers out totaling $508,907 in fiscal 2012 to support other funds,
pay debt service, and provide for construction projects.
Operating revenue in the Sewer Fund was $2,502,409, an increase of $273,461, or 12.3 percent, from the
prior year, mainly related to increased consumption and an increase to the rate for Metropolitan Council
Environmental Services (MCES). Sewer Fund operating expenses for 2012 were $2,342,915, a decrease
of $73,584, or 3.0 percent, from the previous year due to fewer repairs and maintenance needs.
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WQEF
ATERUALITY NTERPRISEUND
The following graph presents five years of comparative operating results for the City’s Water Quality
Fund:
Water Quality Enterprise Fund
Year Ended December 31,
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$–
$(100,000)
$(200,000)
20082009201020112012
Operating RevenueOperating Expenses
Operating Income (Loss)Income Before Depreciation
The Water Quality Fund ended 2012 with net position of $787,256, an increase of $16,110 from the prior
year. Of this, $592,127 represents the investment in capital assets, leaving $195,129 in unrestricted net
position.
Operating revenue in the Water Quality Fund was $552,264, an increase of $113,626, or 25.9 percent,
from the prior year due to an increase in the rates in fiscal 2012. Water Quality Fund operating expenses
for 2012 were $362,459, a decrease of $165,469, or 31.3 percent, from the previous year due mostly to
fewer repairs and maintenance services.
State and federal grant income, which is not included in the table above, totaled $70,237 in fiscal 2012.
After including this revenue, the Water Quality Fund reflected income before contributions and transfers
of $269,703.
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TF
RANSIT UND
The following graph presents operating revenues over the last five years for the City’s Transit Fund:
Transit Fund
Year Ended December 31,
$1,000,000
$750,000
$500,000
$250,000
$–
$(250,000)
$(500,000)
$(750,000)
20082009201020112012
Operating RevenueOperating Expenses
Operating Income (Loss)
The Transit Fund ended 2012 with net position of $1,578,634, a decrease of $115,857 from the prior year.
The entire amount represents unrestricted net position.
Operating revenue in the Transit Fund was $198,805, a decrease of $20,500, or 9.3 percent, from the prior
year. Transit Fund operating expenses for 2012 were $841,040, an increase of $7,467 from the previous
year.
Most of the funding for the transit services comes from other governmental units and their revenue is
reported in the nonoperating revenue category. State and federal grant income totaled $485,016 in fiscal
2012. After including this revenue, the Transit Fund reflected a decrease in net position of $115,857 in
fiscal 2012.
The Transit Fund had an overall decrease in net position of $115,857 in fiscal 2012. We recommend that
the City continue to monitor the future financial projections to ensure the future financial stability of this
fund.
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GOVERNMENT-WIDE FINANCIAL STATEMENTS
In addition to fund-based information, the current reporting model for governmental entities also requires
the inclusion of two government-wide financial statements designed to present a clear picture of the City
as a single, unified entity. These government-wide financial statements provide information on the total
cost of delivering services, including capital assets and long-term liabilities.
SNP
TATEMENT OF ETOSITION
The Statement of Net Position essentially tells you what your city owns and owes at a given point in time,
the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to
use for providing services after its debts are settled. However, those resources are not always in
spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net
position is divided into three components: net investment capital assets, restricted, and unrestricted.
The following table presents the components of City’s net position as of December 31, 2012 and 2011 for
governmental activities and business-type activities:
As of December 31,Increase
(Decrease)
20122011
Net position
Governmental activities
Net investment in capital assets75,168,765$ 69,018,493$ 6,150,272$
Restricted5,087,442 7,620,676 (2,533,234)
Unrestricted14,805,650 13,872,720 932,930
90,511,88995,061,857 4,549,968
Total governmental activities
Business-type activities
Net investment in capital assets45,764,121 45,435,153 328,968
Unrestricted7,332,348 6,980,909 351,439
52,416,06253,096,469 680,407
Total business-type activities
$ 142,927,951148,158,326$ 5,230,375$
Total net position
The City’s total net position at December 31, 2012 was $5,230,375 higher than the total net position
reported at the previous year-end. The decline in the restricted net position balance was mostly due to the
use of capital project construction funds totaling $2,426,226 in fiscal 2012.
At the end of the current fiscal year, the City is able to present positive balances in all three categories of
net position, both for the government as a whole, as well as for its separate governmental and
business-type activities. The same situation held true for the prior year.
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SA
TATEMENT OF CTIVITIES
The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other
transactions that increase or reduce total net positions. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund-based financial statements. This statement includes the
cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses.
The following table presents the change in the net position of the City for the years ended December 31,
2012 and 2011:
20122011
Program
ExpensesRevenuesNet ChangeNet Change
Net (expense) revenue
Governmental activities
$ 1,041,8633,156,038$ (2,114,175)$ (1,799,611)$
General government
1,834,6524,744,743 (2,910,091) (3,075,775)
Public safety
4,319,5444,931,149 (611,605) (2,308,642)
Public works
929,3632,231,995 (1,302,632) (1,912,385)
Culture and recreation
1,653,380595,770 1,057,610 (628,884)
Economic development
–2,101,559 (2,101,559) (1,603,642)
Interest on long-term debt
Business-type activities
3,426,3832,057,934 1,368,449 378,712
Water
2,502,4092,345,657 156,752 (178,282)
Sewer
622,501362,459 260,042 105,423
Water quality
683,821841,040 (157,219) (62,611)
Transit
$ 17,013,91623,368,344$ (6,354,428) (11,085,697)
Total net (expense) revenue
General revenues
10,896,17310,520,436
Taxes
16,83118,066
Unrestricted grants and contributions
891,574697,847
Investment earnings
168,299348,454
Other revenues
Total general revenues
11,972,87711,584,803
$ 887,1805,230,375$
Change in net position
One of the goals of this statement is to provide a side-by-side comparison to illustrate the difference in the
way the City’s governmental and business-type operations are financed. The table clearly illustrates the
dependence of the City’s governmental operations on general revenues, such as property taxes and
unrestricted grants. It also shows that, for the most part, the City’s business-type activities are generating
sufficient program revenues (service charges and program-specific grants) to cover expenses. This is
critical given the current downward pressures on the general revenue sources.
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ACCOUNTING AND AUDITING UPDATES
GASBSN.61–TFRE:O
TATEMENT OHEINANCIALEPORTING NTITYMNIBUS
This statement amends the current guidance in GASB Statement No. 14, The Financial Reporting Entity,
for identifying and presenting component units. Potential component units that meet the fiscal
dependency criterion for inclusion in the financial reporting entity under existing guidance will only be
included if there is also “financial interdependency” (an ongoing relationship of potential financial benefit
or burden) with the primary government. This statement also clarifies the types of relationships that are
considered to meet the “misleading to exclude” criterion for inclusion as a component unit; changes the
criteria for blending component units; gives direction for the determination and disclosure of major
component units; and adds a requirement to report an explicit, measurable equity interest in a discretely
presented component unit in a statement of position prepared using the economic resources measurement
focus. The requirements of this statement must be implemented for periods beginning after June 15,
2012, with earlier implementation encouraged.
GASBSN.65–IPRAL
TATEMENT OTEMSREVIOUSLY EPORTED AS SSETS AND IABILITIES
This statement establishes accounting and financial reporting standards that reclassify, as deferred
outflows of resources or deferred inflows of resources, certain items previously reported as assets and
liabilities; and recognizes, as outflows or inflows of resources, certain items previously reported as assets
and liabilities. This statement also provides financial reporting guidance related to the impact of the
financial statement elements deferred outflows of resources and deferred inflows of resources, such as
changes in the determination of the major fund calculations and limiting the use of the term deferredin
financial statement presentations. The provisions of this statement are effective for financial statements
for periods beginning after December 15, 2012. Earlier application is encouraged.
GASBSN.67–FRPP–A
TATEMENT OINANCIAL EPORTING FOR ENSION LANS AN MENDMENT OF
GASBSN.2550
TATEMENTOS AND
The primary objective of this statement is to improve financial reporting by state and local government
pension plans. GASB Statement No. 67 replaces the requirements of GASB Statement Nos. 25 and 50
for pension plans that are administered through trusts or equivalent arrangements that meet the following
criteria: contributions from employers and nonemployer contributing entities to the pension plan and
earnings on those contributions are irrevocable; pension plan assets are dedicated to providing pensions to
plan members in accordance with the benefit terms; and pension plan assets are legally protected from the
creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan
is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan
members. The requirements of GASB Statement Nos. 25 and 50 remain applicable to pension plans that
are not administered through trusts covered by the scope of this statement and to defined contribution
plans that provide post-employment benefits other than pensions. The statement makes a number of
changes in the financial statement presentation, measurement, and required disclosures relating to the
reporting of these types of pension plans. This statement is effective for financial statements for fiscal
years beginning after June 15, 2013. Earlier application is encouraged.
GASBSN.68–AFRP–
TATEMENT OCCOUNTING AND INANCIAL EPORTING FOR ENSIONS AN
AGASBSN.2750
MENDMENT OF TATEMENTOS AND
The primary objective of this statement is to improve accounting and financial reporting by state and local
governments for pensions. This statement replaces the requirements of GASB Statement Nos. 27 and 50,
as they relate to pensions that are provided through pension plans administered as trusts or equivalent
arrangements that meet certain criteria (as described earlier for GASB Statement No. 67). The
requirements of GASB Statement Nos. 27 and 50 remain applicable for pensions that are not covered by
the scope of this statement.
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This statement establishes standards for measuring and recognizing liabilities, deferred outflows of
resources, deferred inflows of resources, and expense/expenditures. In addition, this statement details the
recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit
pension plan and for employers whose employees are provided with defined contribution pensions. This
statement also addresses circumstances in which a nonemployer entity has a legal requirement to make
contributions directly to a pension plan. This statement is effective for financial statements for fiscal
years beginning after June 15, 2014. Earlier application is encouraged.
Included in this statement are major changes in how employers that participate in cost-sharing pension
plans, such as TRA and PERA, account for pension benefit expenses and liabilities. In financial
statements prepared using the economic resources measurement focus and accrual basis of accounting
(government-wide and proprietary funds), a cost-sharing employer that does not have a special funding
situation is required to recognize a liability for its proportionate share of the net pension liability of all
employers with benefits provided through the pension plan. A cost-sharing employer is required to
recognize pension expense and report deferred outflows of resources and deferred inflows of resources
related to pensions for its proportionate share of collective pension expense and collective deferred
outflows of resources and deferred inflows of resources related to pensions. In addition, the effects of
(1) a change in the employer’s proportion of the collective net pension liability and (2) differences during
the measurement period between the employer’s contributions and its proportionate share of the total of
contributions from employers included in the collective net pension liability are required to be
determined. These effects are required to be recognized in the employer’s pension expense in a
systematic and rational manner over a closed period equal to the average of the expected remaining
service lives of all active and inactive employees that are provided with pensions through the pension
plan.
GASBSN.69–GCDG
TATEMENT OOVERNMENTOMBINATIONS AND ISPOSALS OF OVERNMENT
O
PERATIONS
This statement provides accounting and financial reporting guidance, including disclosure requirements,
for government combinations and disposals of government operations. Government combinations
include mergers, acquisitions, and transfers of operations. Included within the scope of this statement are
combinations of governmental entities or combinations of governmental entities, with nongovernmental
entities (such as a nonprofit entity) as long as the new or continuing organization is a government. This
statement does not apply to combinations in which a government acquires an organization that continues
to exist as a separate entity, or acquires an equity interest in an organization that remains legally separate
from the acquiring government. A disposal of operations occurs when a government either transfers or
sells specific operations. The provisions of this statement are effective for financial statements for
periods beginning after December 15, 2013. Earlier application is encouraged.
PCRFG
ROPOSEDHANGES TO EQUIREMENTS FOR EDERALRANTS
The U.S. Office of Management and Budget (OMB) has issued for comment Proposed OMB Uniform
Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards, which proposes
broad revisions to OMB Circular A-133 and other key grant reforms. The proposed guidance includes a
number of significant changes to the federal Single Audit process, including; an increase in dollar
threshold for requiring a Single Audit, changes to the process for determining major programs, a
reduction in the percentage of expenditures required to be covered by a Single Audit, revised criteria for
determining low-risk auditees, a reduction in the types of compliance requirements to be tested, and an
increase in the threshold for reporting questioned costs. The proposed guidance would also consolidate
OMB circulars and cost principles; and change certain federal requirements related to indirect costs, time
and effort reporting, and grant administration.
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