HomeMy WebLinkAbout10A - 2006 Finance Report
c~_o_ ~ PRIO/f~?\ 4646 Dakota Street S.E.
U ~ I Prior Lake, MN 55372-1714
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MEETING DATE:
AGENDA #:
PREPARED BY:
AGENDA ITEM:
DISCUSSION:
CITY COUNCIL AGENDA REPORT
MAY 21,2007
10A
Ralph Teschner, Finance Director
CONSIDER APPROVAL OF 2006 ANNUAL FINANCIAL REPORT AND
MANAGEMENT LETTER
Introduction
Included with this agenda report is a copy of the 2006 Financial Report along
with the management letter prepared by the certified public accountant firm of
Abdo, Eick and Meyers as required by Minnesota Statute. 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 2006.
Current Circumstances
The audit report represents the financial reporting model that reflects GASB
Statement No. 34 as required by the Governmental Accounting Standards
Board (GASB). This 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. A statement of net assets is
included that identifies capital fixed assets, i.e. land, buildings and
improvements. As stated in the financial report, the city's overall net asset
financial position is $123,724,842 and represents an increase of $14,043,610
from 2005's year-end position. The majority of the increase is from contributed
capital by developers as a result of public utility projects completed during the
year, additional park land, fixed asset purchases i.e., equipment and vehicles
and increased cash reserves.
Contained within the financial report is a legal compliance audit which was
performed to ensure compliance with Minnesota Statutes in the six areas of;
contracting and bidding, deposits and investments, conflicts of interest, public
indebtedness, claims and disbursements and miscellaneous provisions. 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 six 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).
GASB requires that a "Management's Discussion and Analysis" known as an
MD&A be assimilated to provide supplementary information to facilitate a
greater understanding of the audit report by the general reader. New within this
year's MD&A is a section attributed to the financial management policies of the
City. A key element within the City's 2030 Vision and Strategic Plan is the
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ALTERNATIVES:
RECOMMENDED
MOTION:
ability to demonstrate strong financial management. Establishing "Financial
Performance Gold Standards" provides the City a measure of its financial
health. Seven (7) objectives have been identified to serve as a fiscal
accountability report card. All are discussed and graphically profiled within the
MD&A section of the 2006 annual financial report.
The audit has been prepared in accordance with generally accepted
accounting principals. The primary results of the General Fund as indicated
within the 2006 audit are:
1.) Actual revenues of $12,059,159 (including transfers in), compared to
budgeted revenues of $10,840,734 or 111 % of projection.
2.) Operating expenditures were $10,580,129 compared to budgeted
expenditures of $10,840,734, or 98% of budget.
3.) Gross revenues exceeded expenditures in the amount of $1,479,030
and a net of $979.030.00 after including the $500,000 Building Fund
contribution authorized by RS 06-064.
The 2006 year-end General Fund balance (which is maintained for cash flow
and emergency purposes) increased to $5,276,400 that represents a reserve
of 45% of the 2007 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 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 2006 Annual Financial Report and Management Letter as
submitted.
2. Delay action according to a specific Council reason.
Alternative 1. Staff recommends acceptance of the management letter and the
financial report for the fiscal year ended December 31, 2006 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 29, 2007 along with this report.
Please feel free to contact Staff prior to the meeting if you have any questions
or would like to review the report (distributed with last week's Update) on a
more comprehensive basis. 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.
ATTACHMENTS:
1. Management Letter
"
Ii) A
Certified Public Accountants & Consultants
March 15,2007
Grandview Square
5201 Eden Avenue
Suite 370
Edina, MN 55436
Honorable Mayor and Council
City of Prior Lake
Prior Lake, Minnesota
We have audited the [mancial statements of the governmental activities, the business-type activities, each major fund, and the
aggregate remaining fund information ofthe City of Prior Lake, Minnesota (the City) for the year ended December 31,2006
which collectively comprise the City's basic [mancial statements as listed in the table of contents and have issued our report
thereon dated March 15,2007. Professional standards require that we provide you with the following information related to our
audit.
Our Responsibility Under Generally Accepted Auditing Standards in the United States of America
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 [mancial 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 [mancial statements of the City, for the year ended December 31,2006, 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..o.pinion on compliance with such provisions. We noted no instances of noncompliance 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 1 to the [mancial statements. 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.
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March 15,2007
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. The most sensitive estimates affecting the financial
statements were capital asset basis and depreciation.
Management's estimate of capital asset basis was based on estimated historical cost and depreciation was based on the estimated
useful lives of capital assets. We evaluated the key factors and assumptions used to develop these accounting estimates in
determining that they are reasonable in relation to the fmancial statements taken as a whole.
Audit Adjustments
For purposes of this letter, professional standards defme an audit adjustment as a proposed correction of the fmancial statements
that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment mayor may not
indicate matters that could have a significant effect on the City's fmancial 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 define a disagreement with management as a matter, whether or not resolved to
our satisfaction, concerning a financial accounting, reporting or auditing matter that could be significant to the 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. Ifa 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.
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March 15,2007
Page Three
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 increased $979,030 during
2006. The fund balance of $5,276,400 is 45 percent of the 2007 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 150
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.
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March 15,2007
Page Four
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The purposes and benefits of a General fund balance are as follows:
Purposes and Benefits
City of Prior Lake
March 15,2007
Page Five
· 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 fmance the
General fund expenditures.
. The City is vulnerable to legislative actions at the State and Federal level. The State eliminated HACA aid with the 2001
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 fmancing
needed for such expenditures.
. A strong fund balance will assist the City in maintaining, improving or obtaining a bond rating.
The 2006 operations are summarized as follows:
· Local economic downturns can negatively impact revenues that especially affect growth communities.
Variance with
Final Final Budget -
Budgeted Actual Positive
Amounts Amounts (Negative)
$ 10,590,734 $ 11,779,159 $ 1,188,425
9,550,699 9,289,567 261,132
1,040,035 2,489,592 1,449,557
Revenues
Expenditures
Excess of revenues over expenditures
Other fmancing sources (uses)
Transfers in
Transfers out
250,000
(1,290,035)
Total other fmancing sources (uses)
(1,040,035)
Net change in fund balances
Fund balances, January 1
4,297,370
Fund balances, December 31
$ 4,297,370
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280,000
(1,790,562)
(1,510,562)
979,030
4,297,370
$ 5,276,400 $
30,000
(500,527)
(470,527)
979,030
979,030
City of Prior Lake
March 15,2007
Page Six
A more detailed comparison of actual General fund revenues and transfers with the prior three years is as follows:
Percent
of
Source 2004 2005 2006 Total
Taxes $ 5,515,209 $ 5,819,585 $ 7,045,404 58.4 %
Licenses and permits 814,614 772,793 832,610 6.9
Intergovernmental 1,040,846 1,097,356 1,155,058 9.6
Charges for services 1,042,344 1,092,689 1,193,084 9.9
Fines and forfeitures 151,592 158,242 194,641 1.6
Interest on investments 142,971 42,569 211,079 1.8
Miscellaneous 169,367 673,195 1,147,283 9.5
Transfers in 250,000 250,000 280,000 2.3
Total revenues and transfers $ 9,126,943 $ 9,906,429 $ 12,059,159 100.0 %
The past three years revenues and transfers are graphically presented as follows:
Revenues and Transfers
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
2004 2005 2006
~Taxes -Intergovernmental ~Charges for services ~Other
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March 15,2007
Page Seven
A more detailed comparison of actual expenditures and transfers with the prior three years is as follows:
Percent
of
Program 2004 2005 2006 Total
Current
General government $ 1,649,839 $ 1,781,100 $ 2,001,747 18.1 %
Public safety 2,991,005 3,286,546 3,609,424 32.5
Public works 1,410,812 1,572,328 1,520,959 13.7
Culture and recreation 1,371,493 1,396,595 1,639,960 14.8
Economic development 172,214 107,555 145,042 1.3
Contingency 91,734 141,674 1.3
Total current 7,687,097 8,144,124 9,058,806 81.7
Capital outlay 137,696 262,116 230,761 2.1
Transfers out 1,020,228 1,573,648 1,790,562 16.2
Total expenditures and transfers $ 8,845,021 $ 9,979,888 $ 11,080,129 100.0 %
The prior three years expenditures and transfers are graphically presented as follows:
Expenditures and Transfers
$4,000,000
$500,000
--
-
-
-
n ..
~ -w
..
,T, ~'
.....
- -
.IT'
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$-
2004
2005
2006
~General government -Public safety .....Culture and recreation ~Transfers out Other
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City of Prior Lake
March 15, 2007
Page Eight
Nonmajor Special Revenue Funds
Nonmajor 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 Balances
December 31, Increase
Fund 2006 2005 (Decrease)
Capital Park $ 1,031,299 $ 229,406 $ 801,893
Severance Compensation 211,973 200,458 11,515
EDC Revolving Loan 88,546 83,736 4,810
Revolving Loan 60,867 51,298 9,569
DAG 1,051,551 854,539 197,012
Cable Franchise 39,425 39,425
EDA 90,900 87,3 10 3,590
Total $ 2,574,561 $ 1,546,172 $ 1,028,389
All funds have positive fund balances and provide reserves for future expenditures.
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City of Prior Lake
March 15,2007
Page Nine
Capital Projects Funds
The following funds account for capital projects:
Fund Balances
December 31, Increase
Fund 2006 2005 (Decrease)
Major
Construction $ 551,579 $ 1,045,776 $ (494,197)
Trunk Reserve 4,537,729 5,486,191 (948,462)
Building 3,180,247 9,914,139 (6,733,892)
Subtotal 8,269,555 16,446,106 (8,176,551)
Nonmajor
Downtown Redevelopment $ 31,914 $ 31,914 $
Tax Increment 61,587 45,033 16,554
Revolving Equipment 2,413,111 1,193,954 1,219,157
Street Oversizing 1,259,540 693,293 566,247
Water Storage 2,088,470 338,700 1,749,770
Tax Increment 2-2 Becker 263 (263)
Tax Increment 2-3 Amer/Metro 862 (862)
Tax Increment 2-5 E.M. Prod. 2,394 (2,394)
Tax Increment 2-6 NBC 899 (899)
Tax Increment 2-7 Award Prin, 970 (970)
Tax Increment 2-8 D Hansen 2,110 (2,110)
Tax Increment 1-3 Lakefront 27,969 12,960 15,009
Tax Increment 3-1 Creekside 12,864 6,556 6,308
Tax Increment 4-1 190 190
Subtotal 5,895,645 2,329,908 3,565,737
Total $ 14,165,200 $ 18,776,014 $ (4,610,814)
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City of Prior Lake
March 15,2007
Page Ten
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
Description Cash Assets Outstanding Date
Fire Hall Bonds $ $ $ 1,050,000 2013
G.O. Fire Hall Bonds 3,700,000 2031
Park G.O. (Refunded 2005) 6,040,000 2017
Building Revenue (Refunded 2005) 1,200,000 2014
City Hall 9,900,000 2029
Pike Lake (Refunded 2004) 86,919 87,429 145,000 2007
Duluth (Refunded 2004) 119,828 178,126 275,000 2008
Candy Cove (Refunded 2004) 165,890 208,369 340,000 2009
Oak Ridge 200,471 299,131 490,000 2010
Frog Town 207,664 275,871 535,000 2011
Pixie Point 226,121 319,000 650,000 2012
150th Mitchell Commons 198,634 672,896 1,400,000 2013
Tax Increment 2004 13,605 13,605 370,000 2024
Breezy Point 425,507 959,316 2,200,000 2014
Fish Point 963,407 2,366,748 2,260,000 2015
$ 2,608,046 $ 5,380,491 $ 30,555,000
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.
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March 15,2007
Page Eleven
Enterprise Funds
Water and Sewer Utilities
The Water and Sewer Utilities fund are accounted for in a separate enterprise fund and a summary follows:
The operations for the past three years are graphically presented below:
2004 2005 2006
Amount Percent Amount Percent Amount Percent
Operating revenues $ 3,972,789 100.0 % $ 4,829,418 100.0 % $ 5,203,016 100.0 %
Operating expenses 3,167,260 79.7 3,520,867 72.9 3,554,844 68.3
Operating income (loss) 805,529 20.3 1,308,551 27.1 1,648,172 31.7
Nonoperating
revenues (expenses) 128,095 3.2 (338,667) (7.0) 368,896 7.1
Income (loss)
before transfers 933,624 23.5 969,884 20.1 2,017,068 38.8
Transfers in 539,667 11.2 252,760 4.9
Contributions from developers 958,911 18.4
Contributions from other funds 812,202 20.4 770,045 15.9 351,657 6.8
Transfers out (1,668,387) (42.0) (1,450,423) (30.0) (500,406) (9.6)
Change in
net assets $ 77,439 1.9 % $ 829,173 17.2 % $ 3,079,990 59.2 %
Cash and
investments $ 2,822,332 $ 3,438,374 $ 5,451,682
Water and Sewer Utilities Summary
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
$(1,000,000)
2004 2005 2006
. Operating revenues . Operating expenses . Nonoperating revenues (expenses) 0 Income (loss) before transfers
The current cash balance has improved each of the last two years and is very good relative to operations. The current margins
are generating excellent cash flow and the cash balance will provide for future expansion and maintenance of the system.
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March 15,2007
Page Twelve
Storm Water Utility
The operations for the past three years are graphically presented below:
Although the cash balance appears adequate, the City should continue to evaluate operations annually to ensure rates are
sufficient.
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March 15,2007
Page Thirteen
Transit Services
The operations for the past three years are graphically presented below:
Most of the funding for transit services comes from governmental units and their revenue is reported in the nonoperating
revenue (expenses) category representing MVET (Motor Vehicle Excise Tax) state transit aid.
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Ratio Analysis
City of Prior Lake
March 15,2007
Page Fourteen
The following captures a few ratios from the City's fmancial statements that give some additional information for trend and peer
group analysis. The peer group average consists of the average of Abdo, Eick & Meyers' client base of approximately 90 cities.
The majority of these ratios facilitate the use of economic resources focus and accrual basis of accounting at the government-wide
level. A combination of liquidity (ability to pay its most immediate obligations), solvency (ability to pay its long-term
obligations), funding (comparison offmancial amounts and economic indicators to measure changes in fmancial capacity over
time) and common-size (comparison of fmancial data with other cities regardless of size) ratios are shown below.
Ratio Calculation Source 2004 2005 2006
Current Current assets/current liabilities Government -wide 4.3 5.2 7.4
Debt to assets Total liabilities/total assets Government-wide 19% 22% 21%
Debt per capita Bonded debt/population Government-wide $ 911 $ 1,$67 $ 1,$8$
Taxes per capita Tax revenues/population Government-wide
Expenditures per capita Governmental fund expenditures/ Governmental funds
population
Capital assets % left to depreciate - Net capital assets/ Government-wide 72% 78% 77%
Governmental gross capital assets
Capital assets % left to depreciate - Net capital assets/ Government-wide 68% 79% 78%
Business-type gross capital assets
Charges to total operating revenues - Governmental charges for services/ Government-wide 18% 17% 15%
Governmental governmental operating revenue
Unrestricted net assets to Unrestricted net assets/ Government-wide 216% $0$% $41%
operating expenses operating expenses
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March 15,2007
Page Fifteen
Current Ratio (Liquidity Ratio)
The current ratio is a comparison of a city's current assets to its current liabilities. The current ratio is an indication of a city's
ability to meet short-term debt obligations. Acceptable current ratios vary from industry to industry, but a current ratio between 1
and 2 is considered standard. If a city's current assets are in this range, then it is generally considered to have good short-term
fmancial strength. If current liabilities exceed current assets (the current ratio is below 1), then the city may have problems
meeting its short-term obligations. A current ratio that is higher reflects the City's fiscal strength.
8.3
7.3
6.3
5.3
4.3
3.3
2.3
1.3
0.3
7.4
5.2
4.3
.....
.... .-
4.0 3.8
,
2004
2005
2006
City ratio --- Peer group average I
Debt-to-Assets Leverage Ratio (Solvency Ratio)
The debt-to-assets leverage ratio is a comparison of a city's total liabilities to its total assets or the percentage of total assets that
are provided by creditors. It indicates the degree to which the City's assets are fmanced through borrowings and other long-term
obligations (i.e. a ratio of 50 percent would indicate half of the assets are fmancing with outstanding debt).
33%
31%
29%
27%
25%
23%
21%
19%
17%
15%
..... .....
..... .....
30% 30%
22%
21%
19%
2004
2005
2006
City ratio ......... Peer group average I
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March 15,2007
Page Sixteen
Bonded Debt per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total bonded debt by the population of the city and represents the amount of
bonded debt obligation for each citizen of the city at the end of the year. The higher the amount, the more resources are needed in
the future to retire these obligations through taxes, assessments or user fees.
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
..... .....
..... -
$2,998 $2,995
$1,367 $1,383
$911
2004
2005
2006
City ratio -Peer group average I
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March 15,2007
Page Seventeen
Taxes per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total tax revenues by the population ofthe city and represents the amount oftaxes
for each citizen of the city for the year. The higher this amount is, the more reliant the city is on taxes to fund its operations.
$380
$370
$360
$350
$340
$330
$320
$310
$300
.....
... $369 $362
$355
$340
$305
2004
2005
2006
City ratio -Peer group average I
Expenditures per Capita (Funding Ratio)
This dollar amount is arrived at by dividing the total governmental expenditures by the population of the City and represents the
amount of governmental expenditure for each citizen of the City during the year. Because ofmajor capital projects from year to
year, this number may fluctuate accordingly.
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
$1,407 $1 408
- .....
--
$1,285 $1,242
$1010
2004
2005
2006
City ratio -Peer group average I
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March 15,2007
Page Eighteen
Capital Assets Percentage (Common-size Ratio)
This percentage represents the percent of governmental or business-type capital assets that are left to be depreciated. The lower
this percentage, the older the city's capital assets are and may need major repairs or replacements in the near future. A higher
percentage may indicate newer assets being constructed or purchased and may coincide with higher debt ratios or bonded debt per
capita.
Governmental Activities
80%
78% 77%
72%
IIIIIIII -
""""
62% 61%
,
75%
70%
65%
60%
55%
50%
2004
2005
2006
City ratio -Peer group average I
Business-type Activities
85%
80%
79% 78%
68%
.....
..... -
64% 63%
75%
70%
65%
60%
55%
50%
2004
2005
2006
City ratio -Peer group average I
952.835.9090 . Fax 952.835.3261
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.
City of Prior Lake
March 15,2007
Page Nineteen
.
Charges for Service to Total Operating Revenues (Common-size Ratio)
This percentage is arrived at by dividing charges for service by total operating revenues from governmental operations. This
percentage indicates the percent of governmental operating revenues that are funded by user charges versus other revenues. It
measures the amount of control a city has in funding its governmental operating costs.
26%
24%
22%
20%
18%
16%
14%
12%
10%
23%
18%
17%
15%
2004
2005
2006
City ratio - Peer group average I
Unrestricted Net Assets to Total Expenses (Common-size Ratio)
This percentage is arrived at by dividing total expenses by the unrestricted net assets ofthe city. It indicates percent of
unrestricted funds available at year end to pay for a current year expenses. Approximately every 8 percent represents a month of
funds available to cover expenses, so a percentage of25 percent would indicate funds available to cover 3 months of expenses.
400%
350%
300%
250%
200%
150%
100%
303% 341%
216%
84% 74%
.....
""" 11IIIII
50%
2004
2005
2006
City ratio -Peer group average I
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.
City of Prior Lake
March 15,2007
Page Twenty
.
Other items
The following summarizes new accounting standards effective for future years:
GASB Statement No. 43 - Financial Reportingfor Post Employment Benefit Plans Other than Pension Plans
This statement is effective one year prior to the effective date of Statement No. 45 for the employer or largest participating
employer in the benefit plan for multiple-employer plans. According to Statement No. 43, "The objective of this Statement
is to establish uniform standards of fmancial reporting by State and local governmental entities for other post employment
benefit plans (OPEB plans). The term other post employment benefits (OPEB) refers to post employment benefits other
than pension benefits and includes (a) post employmenthealthcare benefits and (b) other types of post employment benefits
(for example, life insurance) if provided separately from a pension plan. The term plans, in this context, refers to trust or
other funds through which assets are accumulated to fmance OPEB, and benefits are paid as they come due. This Statement
provides standards for measurement, recognition, and display of the assets, liabilities, and, where applicable, net assets and
changes in net assets of such funds and for related disclosures. The requirements of this Statement apply whether an OPEB
plan is reported as a trust or agency fund or a fiduciary component unit of a participating employer or plan sponsor, or the
plan is separately reported by a public employee retirement system (PERS) or other entity that administers the plan."
GASB Statement No. 45 - Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than
Pensions
This statement is effective in three phases based on a government's total armual revenues in the fIrst fiscal year ending after
June 15, 1999:
· Governments that were phase 1 governments for the purpose of implementation of Statement No. 34 - those with
annual revenues of $1 00 million or more - are required to implement this Statement in fmancial statements for
periods beginning after December 15,2006.
· Governments that were phase 2 governments for the purpose of implementation of Statement No. 34 - those with
total annual revenues of $1 0 million or more but less than $100 million - are required to implement this Statement in
fmancial statements for periods beginning after December 15,2007.
· Governments that were phase 3 governments for the purpose of implementation of Statement No. 34 - those with
total annual revenues of less than $10 million - are required to implement this Statement in financial statements for
periods beginning after December 15,2008.
Statement No. 45 gives the following summary, "In addition to pensions, many state and local governmental employers
provide other post employment benefits (OPEB) as part of the total compensation offered to attract and retain the services
of qualified employees. OPEB includes post employment healthcare, as well as other forms of post employment benefits
(for example, life insurance) when provided separately from a pension plan. This Statement establishes standards for the
measurement, recognition, and display ofOPEB expense/expenditures and related liabilities (assets), note disclosures, and,
if applicable, required supplementary information (RSI) in the fmancial reports of state and local governmental employers."
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-
City of Prior Lake
March 15,2007
Page Twenty-One
..
GASB Statement No. 47 - Accountingfor Termination Benefits
In general, Statement No. 47 is effective for fmancial statements for periods beginning after June 15,2005. However, for
termination benefits that affect defmed benefit post employment benefits other than pensions, governments should
implement Statement 47 simultaneously with Statement No. 45, Accounting and Financial Reporting by Employers for
Post Employment Benefits Other Than Pensions. The Statement provides accounting and reporting guidance for state and
local governments that offer benefits such as early retirement incentives or severance to employees that are involuntarily
terminated. The Statement requires that similar forms oftermination benefits be accounted for in the same manner and is
intended to enhance both the consistency of reporting for termination benefits and the comparability offmancial statements.
New Auditing Standards Related to Risk Assessment (SAS 104 -111)
There are significant changes in the auditing profession that undoubtedly will impact how we perform your annual fmancial
statement audit.
Four years ago, in the wake of the Enron scandal and other business failures, Congress enacted the Sarbanes-Oxley Act. This
legislation had a profound effect on both company management and the audit profession; however, the law was applicable only to
publicly traded companies and so most of our fIrm's clients were unaffected.
Earlier this year, the standards-setting body that governs auditors of non-public entities passed a sweeping set of new standards
that rewrite many of the fundamental principles of a financial statement audit. Though less in scope than the rules for public
companies, these new standards parallel many of the key themes ofSarbanes-Oxley, including new requirements that
· Auditors gain a more thorough understanding of their clients' internal control
· Auditors obtain more detailed information about their clients' operations, their business objectives and strategies, and the
risks to achieving these objectives,
· Client management clearly accept responsibility for preparing all fmancial information and the financial statements.
The main objective of the new auditing standards is to strengthen and maintain the integrity of the independent financial statement
audit. We support this objective. We also believe that the new standards will benefit all stakeholders in the fmancial reporting
process - those who prepare fInancial information, those of us who provide assurance on the reliability ofthat information, and
those who use the information to make decisions about your government.
Because these standards demand a higher level of performance, there will be changes to the way we perform audits. The new
standards require us to perform more extensive procedures than we have in the past. In many cases these new procedures will
result in higher audit fees.
The good news is that the new rules do not go into effect until next year, that is, the 2007 audit. Between now and then, our fInn
will be investing significant resources to re-design our audit process and train our engagement teams so they are able to perform
their audits as effectively and efficiently as possible.
Over the coming months, as we develop our new audit approach, we will have more details about how that approach will affect
our audit clients. Going forward, your engagement partner will be working with you directly to communicate these changes and
pave the way for a smooth implementation of the new, higher standards.
952.835.9090 . Fax 952.835.3261
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-
City of Prior Lake
March 15,2007
Page Twenty-Two
.
.
* * * * *
This report is intended solely for the information and use of Council, management and the Minnesota Office of the State Auditor
and is not intended and should not be used by anyone other than those specified parties.
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. The comments and recommendations 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.
()1b &Jt.. ~~ JLL!
March 15, 2007
Minneapolis, Minnesota
ABDO, EICK & MEYERS, LLP
Certified Public Accountants
952.835.9090 . Fax 952.835.3261
www.aemcpas.com