The URL can be used to link to this page

Home My WebLink About10D - 2003 Financial Report 16200 Eagle Creek Avenue S.E. Prior Lake, MN 55372-1714 STAFF AGENDA REPORT MEETING DATE: AGENDA #: PREPARED BY: AGENDA ITEM: MAY 17,2003 10D RALPH TESCHNER, FINANCE DIRECTOR CONSIDER APPROVAL OF 2003 ANNUAL FINANCIAL REPORT AND MANAGEMENT LEITER DISCUSSION: History Council members have received a copy of the 2003 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 17th 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 2003. Current Circumstances The audit report represents a new financial reporting model that reflects GASB Statement No. 34 as required by the Governmental Accounting Standards Board (GASB). This new format represents a consolidation of the city's financial reporting activity into two groups; governmental activities and business-type activities that includes a statement of net assets. The most significant difference that the reader will notice from past reports is that a statement of net assets is present that includes capital fixed assets, i.e. land, buildings and improvements that were not included before. As a result the bottom line in our financial statements increases, on paper at least, by nearly $55 million dollars. 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). H: \AUDIT\Agendaaudit.doc www.cityofpriorlake.com Phone 952.447.4230 1 Fax 952.447.4245 ALTERNATIVES: H: \AUDI1\Agendaaudit.doc The audit has been prepared in accordance with generally accepted accounting principals. The primary results indicated within the 2003 audit are: 1.) Actual revenues of $8,950,168 (including transfers in), compared to budgeted revenues of $8,636,532 or 104% of projection. 2.) Operating expenditures were $8,701,387 compared to budgeted expenditures of$8,636,532 or 101% of budget. 3.) Gross revenues exceeded expenditures in the amount of $248,781.00. The 2003 year-end General Fund balance (which is maintained for cash flow and emergency purposes) increased to $4,088,9p7 that represents a reserve of 47% of the 2004 General Fund Budget or above the council recognized minimum 30% threshold, and consistent with the auditor's recommendation of 40-50%. Also, it falls within the acceptable level of 35-50% as defined by the State Auditor's Office. The reserve growth occurred primarily because of two 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 virtually all of the revenue increase was attributed to growth related revenues, specifically building permits and development agreement revenue. The two revenue sources associated with factor #2 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 HallIPolice Station/Community Use Center, transportation and development related expenditures and potential state aid cuts. 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. The following alternatives are available to the City Council: 1. Accept the 2003 Annual Financial Report and Management Letter as submitted. 2. Delay action according to a specific Council reason. RECOMMENDATION: Staff recommends acceptance of the management letter and the financial report for the fiscal year ended December 31, 2003 as submitted. A City Financial Reporting Form, which is basically a condensed excerpt of the official document, is required to be submitted to the Office of the State Auditor by June 30, 2004 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, Eick and Meyers will make a brief presentation regarding the report and management letter and respond to any questions the council may have. RECOMMENDED MOTION: the 2003 Annual Financial Report and REVIEWED BY: Attachments: H: \AUDlT\Agendaaudit.doc ABDO EICK & , MEYERSILP CertifU',d Public Acrountants & Consulwnts March 26, 2004 Grandview Square 5201 Eden Avenue Suile 370 Edina, MN 55436 Honorable Mayor and City Council City of Prior Lake Prior Lake, Minnesota We have audited the financial statements of the City of Prior Lake for the year ended December 31, 2003 and have issued our report thereon dated March 26, 2004. Professional standards require that we provide you with the following infonnation related to our audit. Our Responsibility Under GeneraUy Accepted Auditing Standards in the United States of America 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 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. In planning and performing our audit of the fmancial statements of the City, for the year ended December 31,2003, we considered its internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the fInancial statements and not to provide assurance on the internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. We noted no instances of non-compliance with Minnesota statutes. Significant Accounting Policies Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The signifIcant accounting policies used by the City are described in Note I to the fInancial statements. As described in Note 5 to the fInancial statements, the City changed accounting policies related to fmancial reporting by adopting Statement of Governmental Accounting Standards (GASB Statement) No. 34, Basic Financial Statements - and Management's Discussion and Analysis -for State and Local Governments, in 2003. Accordingly, the cumulative effect of the accounting change as of the beginning of the year is reported in Note 5. We noted no other 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. 952.835.9090 · Fax 952.saS.3261 www.aemcpas.com I] City of Prior Lake March 26, 2004 Page Two Accounting Estimates Accounting estimates are an integral part of the fmancial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the general-purpose financial statements and because of the possibility that future events affecting them may differ significantly from those expected. Management's estimate of depreciation expense is an example of an estimate. It is based on the estimated useful life of an asset. We evaluated the key factors and assumptions used to develop the estimated usefullivesjn determining that it is reasonable in relation to the financial statements taken as a whole. Audit Adjustments For purposes of this letter, professional standards defme 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 may or may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future fmancial 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 fmancial reporting process. Disagreements with Management For purposes of this letter, professional standards derme 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. 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 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. 952.835.9090 · Fax 952.8.'l5.3261 www.aemcpas.com 11 City of Prior Lake March 26, 2004 Page Three Governmental Accounting Standards Board (GASB) Statement No. 34 As mentioned previously, the City has implemented GASB Statement No. 34 for the December 31,2003 fmancial statements. The main change resulting from the implementation was issuing financial statements under a new reporting model. The main features of this model are swnmarized below: . Narrative analysis through the Management Discussion & Analysis (MD&A) letter on pages I through X. . Government-wide financial reporting that builds upon traditional fund based fmancial statements. The Govemment- wide financial statement on pages 3 and 4 are intended to give a more concise view of the government as a single unified entity. . More long-term focus for governmental activities. The City now has fixed assets, bonds and compensated absences payable on its Statement of Net Assets for Governmental Activities. The addition of this information should help direct users to a long-term view of the financial data. . A distinction between major and non-major funds. More information is provided on individual funds that meet the criteria to be included as major funds. The general fund, North Shore and Trunk Reserve are considered major governmental funds. The Water and Sewer Utility fund is considered a major business-type activity. . Budgeting analysis that considers both the adopted and final budget. Other Matters The following are areas that came to our attention during the audit that we feel should be reviewed: Financial Position and Results of Operations General Fund The general fund is used to account for resources traditionally associated with government, which are not required legally or by sound principal management to be accounted for in another fund The general fund balance decreased $738,997 from 2002. The fund balance of $4,088,907 is 47 percent of the 2004 budgeted expenditures. We recommend the fund balance be maintained at a level sufficient to fund operations until the major revenue sources are received in June. We feel a reserve of approximately 40 to 50 percent of planned expenditures and transfers out is adequate to meet working capital and small emergency needs. At the current level, the fund balance is within the range of what is generally recommended as a minimum. The Minnesota Office of the State Auditor has classified cities' unreserved fund balance levels relative to expenditures as follows: Extremely low Low Acceptable Moderately high High Very high Extremely high Under 20% 21 - 34 35 - 50 51 - 64 65 - 100 101 - 150 Above 150t The State Auditor does group all general and special revenue funds of the city when making this calculation where our calculation is based only on the general fund. Although there is no legislation regulating fund balance, it is a good policy to designate intended use of fund balance. This helps address citizen concerns as to the use of fund balance and tax levels. 952.835.9090 · Fax 952.8."l5.:i261 www.aemcpas.com I A table summarizing the general fund balance in relation to budget follows: Year 2003 2002 2001 2000 $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 $- Fund Balance Following Year Budszet $ 4,088,907 $ 8,751,570 4,827,904 8,636,532 4,354,411 7,661,883 3,481,261 7,258,361 Fund Balance as a Percent of Next Year's Budget City of Prior Lake March 26, 2004 Page Four Fund Balance as a Percent of Budszet 47% 56 57 48 --- -- - - $8,636,532 $8,751,570 $7,258,361 $7,661,883 .... .... 57% 56% 47% 48% . . . 2000 2001 2002 I-+- Fund Balance -II- Budget I www.aemcpas.com 952.835.9090 · Fax 952.8.~.3261 2003 11 City of Prior Lake March 26, 2004 Page Five The purposes and benefits of a general fund balance are as follows: Purposes and Benefits · Expenditures are incurred somewhat evenly throughout the year. However, 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. The State eliminated HACA aid with the 200 1 legislative session and has since in the 2003 legislative session imposed reductions of market value credit aid and local government aid for some cities. Levy limits have also been implemented for municipalities in past legislative sessions. 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 would 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, improving or obtaining a bond rating. · Local economic downturns can negatively impact revenues that especially affect growth communities. The 2003 operations are summarized as follows: Revenue Expenditures Variance - Favorable Bude:et Actual (Unfavorable ) $ 8,386,532 $ 8,700,168 $ 313,636 7 .881.362 7 .891.457 00.095) 505.170 808.711 303.541 250,000 250,000 (755.170) 0.809.930) (1.054.760) (505.170) 0.559.930) (1.054.760) Excess of revenue over expenditures Other financing sources (uses) Operating transfers in Operating transfers out Total other financing sources (uses) Excess (deficiency) of revenue and other financing sources over expenditures and other financing uses Fund balance, January 1 Prior period adjustment Fund balance, January 1, restated Fund balance, December 31 $ (751.219) $ (751 219) 4,827,904 12.222 4.840.126 $ 4.088.907 · License and permits had the largest variance within revenue. It was $350,745 over budget or 112 percent of the total revenue variance. · Charges for services revenue was $139,694 above budget. · The largest expenditure variance was in contingency. This department was $343,704 over budget. 952.835.9090 · Fax 952.8.~5.3261 www.aemcpas.com ~,,",,-~,,,...~<<",,,,,,,----~,~~~_,-,,,,,,,,-,.-,,,,-,...,-,.,,,,,,..~,".,,~,,,,____..,",",_""'''_,'~,''''''..,~-''-'.>.w-''''''''''''''''~_''_''''''''''''''''',-,.w.~...._"..~_.,"..,~"_~""'_"""""""'''",.~",_",.".......~....~_,___~.",","~_",-,~,,,,,,,,_~;__ .... '. I City of Prior Lake March 26, 2004 Page Six A more detailed comparison of actual general fund revenue and transfers with the prior year is as follows: Percent Percent Increase of of (Decrease) Revenue Source 2003 Total 2002 Total from 2002 Property taxes $ 4,943,816 55.24% $ 3,980,518 45.47% $ 963,298 Licenses and permits 1,016,020 11.35 793,486 9.06 222,534 Intergovernmental 967,455 10.81 1,803,029 20.60 (835,574 ) Charges for services 1,096,928 12.26 1,021,918 11.67 75,010 Fines and forfeitures 114,099 1.27 104,988 1.20 9,111 Interest on investments 140,635 1.57 209,223 2.39 (68,588) Miscellaneous 421,215 4.71 615,982 7.04 (194,767) Operating transfers in 250.000 2.79 225.000 2.57 25.000 Total revenue and transfers $ 8950.168 100 ()()OJIo $ 8754 144 100 00% $ 196 024 The 2003 revenue and transfers are graphically presented as follows: 2003 Revenue Property taxes 55.24% Operating transfers in 2.41% Miscellaneous 4.71% Interest on investments 1.57% Fines and forfeitures 1.17% License and permits 11.35% Charges for services 13.82% Intergovernmental 10.81% 952.835.9090 · Fax 952.8.'i5.3261 www.aemcpas.com 11 City of Prior Lake March 26, 2004 Page Seven A more detailed comparison of actual expenditures and transfers with the prior year is as follows: Percent Percent Increase of of (Decrease) ProlmllllS 2003 Total 2002 Total from 2002 General government $ 1,776,549 18.31 % $ 1,567,247 19.89% $ 209,302 Public safety Police 1,940,243 20.00 1,754,530 22.26 185,713 Fire and rescue 420,714 4.34 283,141 3.59 137,573 Other 453,204 4.67 326,205 4.14 126,999 Public works 1,137,938 11.73 897,749 11.39 240,189 Culture and recreation 1,476,170 15.22 1,268,473 16.10 207,697 Capital outlay 141,066 1.45 448,383 5.69 (307,317) Miscellaneous 545,573 5.62 609,751 7.74 (64,178) Operating transfers out 1.809.930 18.66 725.485 9.20 1.084.445 Total expenditures and transfers $ 9.701 387 100 OOOiO $ 7.880.964 100. ()()oiO $ 1.820 423 The 2003 expenditures and transfers are graphically presented as follows: 2003 Expenditures General government 18.31 % Miscellaneous 5.62% Public safety 29.01 % Operating transfers out 18.66% Capital outlay 1.45% Culture and recreation 15.22% Public works 11.73% 952.835.9090 · Fax 952.8.15.3261 www.aemcpllS.com 11 City of Prior Lake March 26, 2004 Page Eight 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 December 31. Increase 2003 2002 IDecrease ) Capital Park $ 1,537,223 $ 1,275,409 $ 261,814 Severance Compensation 219,787 227,026 (7,239 ) EDC Revolving Loan 77,085 73,389 3,696 Revolving Loan 34,961 27,056 7,905 DAG 413,973 487,395 (73,422 ) Cable Franchise 39,425 95,405 (55,980) EDA 80.368 70.262 10.1 06 Total $ 2 402 822 $ 2 255 942 $ 146 880 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 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 North Shore $ 623,205 $ 1,469,466 $ 464,750 2006 Water Tower 1,435,402 1,435,402 250,250 2006 2001 G.O. Refunding 1,126,738 1,209,848 885,000 2006 Pike Lake 233,390 253,379 465,000 2007 Duluth 241,576 370,917 650,000 2008 Candy Cove 264,334 357,315 650,000 2009 Oak Ridge 280,782 458,558 825,000 2010 Frog Town 279,687 435,396 835,000 2011 Pixie Point 281,163 462,494 950,000 2012 150th Mitchell Commons 148,573 536,919 1,975,000 2013 Fire Hall Bonds 1,385,000 2013 Water Rev. PW Bldg. 417,164 417,164 1,585,000 2014 Park Referendum 7.165.000 2017 Total $ 5332014 $ 7 406 858 $ 18085000 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. 952.8.1.').9090 · Fax 952.8.15.3261 www.aemcpas.com IJ City of Prior Lake March 26, 2004 Page Nine Capital Projects Funds The following funds account for major capital projects: Fund Balance December 31. Increase 2003 2002 (Decrease) Revolving Equipment $ 724,554 $ 745,630 $ (21,076) Building 1,857,561 834,645 1,022,916 Construction 670,016 997,674 (327,658 ) Trunk Reserve 2,721,942 2,022,058 699,884 Collector Street 1,512,184 1,842,184 (330,000 ) Park Referendum 98,824 (98,824 ) Tax Increment 143,597 124,660 18,937 Tax Increment 2-1 Keyland 584 584 Tax Increment 2-2 Becker 3,191 2,860 331 Tax Increment 2-3 AmerIMetro 1,905 505 1,400 Tax Increment 2-5 E.M. Prod. 368 128 240 Tax Increment 2-6 NBC 338 764 (426) Tax Increment 2-7 Award Prin. 923 184 739 Tax Increment 2-8 D Hansen 739 643 96 Downtown Redevelopment 110.609 154.275 (43.666) Total $ 7748511 $ 6825618 $ 922 893 952.835.9090 · Fax 952.8:~5.3261 www.aemcpll8.com II City of Prior Lake March 26, 2004 Page Ten 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 The Water and Sewer Utility fund results of operations for the past three years are as follows: Percent Percent Percent of of of 2003 Total 2002 Total 2001 Total Operating revenue Sewer charges $ 1,777,319 51.1 % $ 1,677,072 55.2% $ 1,553,770 51.7% Water charges 1,253,469 36.1 887,461 29.1 829,978 27.6 Other 445.150 ----.!ll 483.770 ~ 620.457 20.7 Total operating revenue 3,475,938 100.0 3,048,303 100.0 3,004,205 100.0 Total expenses 4.512.109 129.8 2.526.481 82.9 2.104.474 70.1 Operating income (loss) (1,036,171 ) (29.8) 521,822 17.1 899,731 29.9 Nonoperating revenue 4,826,494 138.9 1,810,634 59.4 371,896 12.4 Operating transfers out 0.340.858) (38.6) (960.735) ~) (524.736) ~) Net income $ 2 449 465 --1O...i % $ 1 371 721 .-.A5.Jl% $ 746 891 ~% Cash balance $ 3 787 433 $ 4 943 905 $ 5 259 978 The large operating loss was a result of the automated meter reading project completed in 2003 which replaced 75 percent of the meter stock in the City and incorporated the Hexagram auto reading technology. This project was charged to expense rather than an asset account. The current cash balance is very good relative to operations and 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 large increase in non-operating revenue was due the accounting entries necessary to report the fixed asset additions contributed by the other City funds and developers. 952.835.9090 · Fax 952.saS.3261 www.aemcpas.com I City of Prior Lake March 26, 2004 Page Eleven Storm Water Utility The Storm Water Utility fund results of operations for the past three years are as follows: Percent Percent Percent of of of 2003 Total 2002 Total 2001 Total Total revenue $ 248,338 100.0% $ 171,675 100.0% $ 159,686 100.0% Total expenses 162.285 65.3 150.709 87.8 216.236 135.4 Operating income (loss) 86,053 34.7 20,966 12.2 (56,550) (35.4 ) Nonoperating revenue 3,275 1.3 4,762 2.8 35,588 22.3 Operating transfers in (out) (80.000) (32.2 ) (80.000) (46.6) (52.600) (32.9) Net income (loss) $ 9.328 ~% $ (54.272) ~% $ (73.562) ~)% Cash balance $ 48.028 $ 47840 $ 101.236 Although the cash balance appears adequate, the City should continue to evaluate operations annually to ensure rates are sufficient. Transit Services The Transit Services fund results of operations for the past two years are as follows: Percent Percent of of 2003 Total 2002 Total Total revenue $ 37,719 100.0% $ 31,271 100.0% Total expenses 306.295 812.0 313.556 1002.7 Operating loss (268,576) (712.0) (282,285) (902.7) Nonoperating revenue 531.215 1408.3 538.007 1720.5 Net income $ 262 639 ~% $ 255 722 -8ll8% Cash balance $ 500.816 $ 214.930 Most of the funding for transit services comes from governmental units and their revenue is reported in the non-operating revenue category. 952.835.9090 · Fax 952.8.!J5.3261 www.aemcpll.8.com I City of Prior Lake March 26, 2004 Page Twelve * * * * * This report is intended solely for the information and use of management and Council and is not intended and should not be used by anyone other than those specified parties. Om audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of the accounting records and related data. The comments and reconnnendatiODS in the report are purely constructive in nature, and should be read in this context. If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your convenience. We wish to thank you for the continued opportunity to be of service and for the courtesy and cooperation extended to us by your staff. March 26, 2004 Minneapolis, Minnesota ~Jt*-~m~~LL(J ABDO, EICK. & MEYERS, LLP Certified Public Accountants 952.835.9090 · Fax 952.835.3261 www.aemcpas.com