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HomeMy WebLinkAbout2008 Audit Reports - MMKR Management Report for City of Brooklyn Center, Minnesota December 31, 2008 To the City Council City of Brooklyn Center, Minnesota We have prepared this management report in conjunction with our audit of the City of Brooklyn Center’s (the City) financial report for the year ending December 31, 2008. The purpose of this report is to communicate information relevant to city finances in Minnesota and to provide comments resulting from our audit process. We have organized this report into the following sections: Audit Summary Funding Cities in Minnesota Governmental Funds Overview Financial Trends and Analysis Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. This report is intended solely for the information and use of management, those charged with governance of the City, and those who have responsibility for oversight of the financial reporting process. May 26, 2009 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 audit committee of the City. UA’R NDERSTANDING THE UDITORSESPONSIBILITY Our responsibility, as stated in our engagement letter and as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether 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 misstatements may exist and not be detected by us. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City’s 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. PSTA 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. AOF UDITPINION AND INDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2008: We have issued an unqualified opinion on the City’s financial statements. We noted six matters involving the City’s internal control over financial reporting that we considered to be significant deficiencies, one of which was considered to be a material weakness. These include the following findings: –Segregation of duties within payroll, –Lack of management approval of various accounting transactions, –Inadequate documentation of the components of internal controls, –Lack of established procedures over the verification of utility meter readings, –Prior period adjustment of capital assets and land held for resale records, and –Documentation of eligibility for other post-employment benefits. The results of our testing disclosed no instances of noncompliance that are required to be reported underGovernment Auditing Standards. We have reported one finding based on our testing of the City’s compliance with Minnesota laws and regulations. This relates to one invoice that was not paid on a timely basis. -1- 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. The City implemented Governmental Accounting Standards Board (GASB) Statement No. 45, “Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions,”during the year ended December 31, 2008. This statement provides new guidance on accounting and financial reporting for “other post-employment benefits” (OPEB) accounted for in the financial statements of plan sponsors or employers. The City did recognize in the financial statements a prior period adjustment to properly record capital assets and land held for resale in the governmental activities and eliminate an asset that should not have been in fixed assets last year. There were no other significant transactions that we noted that were recognized in the financial statements in a different period than when the transaction occurred. AA UDITDJUSTMENTS 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. Professional standards define an audit adjustment as a proposed correction of the 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 financial statements to be materially misstated). We proposed one uncorrected audit adjustment to the financial statements for the reporting of governmental activities unamortized discounts on bond proceeds totaling $261,282. Management has determined that the effects of this item are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. AEMJ CCOUNTING STIMATES AND ANAGEMENT UDGMENTS Accounting estimates are an integral part of the basic 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 as follows: Depreciation – Management’s estimates of depreciation expense are based on the estimated useful lives of the assets. Net Other Post-Employment Benefit (OPEB) Liabilities – Actuarial estimates of the net OPEB obligation is based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. Land Held for Resale – Management’s estimates of this asset are based on net realizable value (lower of cost or estimated sales price). Management expects any differences between estimates and actual amounts of these estimates to be insignificant. We reviewed and tested management’s procedures and underlying supporting documentation in the area discussed above. We concluded that the accounting estimates and management judgments appeared to consider all significant factors and resulted in appropriate accounting recognition. -2- MR ANAGEMENTEPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated May 26, 2009. DEPA ISAGREEMENTSNCOUNTERED 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. 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. OM THERATTERS 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. -3- FUNDING CITIES IN MINNESOTA L EGISLATION The following is a brief summary of recent legislative activity affecting the finances of Minnesota cities: Levy Limitations – The 2008 Legislature passed a law that will limit general operating property tax levy increases for Minnesota cities with populations over 2,500 to 3.9 percent annually for the next three years. Local Government Aid (LGA) and Market Value Homestead Credit (MVHC) – Due to the state’s economic condition, Minnesota cities received “unallotment” notices reducing the payment of these state aids for the second half of 2008. It is expected that these payments may again be reduced to cities for the 2009 fiscal year. FRA EDERALECOVERY CT The American Recovery and Reinvestment Act of 2009 is expected to provide approximately $300 billion in federal funds to state and local governments, and to institutions of higher education. These funds are intended to supplement existing federal programs, create new programs, or provide more broad fiscal relief. Many cities are hoping to receive some of these temporary funds for programs and projects. The American Recovery and Reinvestment Act of 2009 mandates that there be an unprecedented amount of oversight and transparency around the spending of these funds, including specific audit requirements. The additional internal control requirements include the need for controls over the acceptance of recovery funds, appropriate controls over the segregation of these funds from other sources of revenue, compliance with the additional laws and regulations specific to each grant award, and additional financial reporting requirements back to the appropriate federal agency. These additional controls also include considerations into whether control procedures are in place over the federal grant expenditures to prevent unallowable expenditures, consideration into whether additional controls and systems will be needed to ensure funds are able to be separately tracked and identified, and consideration into if controls are sufficient for any funds that are passed along to subrecipients. PT ROPERTYAXES Our management reports have tracked the evolution of property tax reform in Minnesota, and explained its impact on cities and their property owners. Now, with very little change in property tax formulas, attention is turning toward our current real estate and housing environment, mortgage foreclosures, and the world economy. -4- Property values within Minnesota cities experienced average increases of 11.0 percent for taxes payable in 2007 and 7.0 percent for those payable in 2008, reflecting the slowdown in growth of market values. In comparison, the City’s market value increased by 5.1 percent in 2007 and 2.7 percent in 2008. It is important to remember that the 2008 market value is based on estimated values as of January 1, 2007, and the housing market is still experiencing difficult times. The following graph shows the City’s changes in taxable market value over the past 10 years: Taxable Market Value $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $– 1999200020012002200320042005200620072008 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 has a different calculation and uses different rates. The graphs show that tax capacities have not increased at the same rate as market values, primarily due to property tax reform occurring over this period of time. The following graph shows the City’s change in tax capacities over the past 10 years: Tax Capacity $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $– 1999200020012002200320042005200620072008 Although it is impossible to consider every aspect and variable of local government spending, average tax rates are often used as a benchmark. -5- Rates expressed as a percentage of net tax capacit y All CitiesSeven-County City of State-WideMetro Area Brooklyn Center 200720082007200820072008 Averae tax rate g Cit 36.336.1 33.4 33.6 43.944.3 y Count 38.038.5 35.2 34.9 38.639.1 y School22.2 21.1 22.7 21.3 26.628.1 Special taxing5.5 5.6 6.8 7.0 8.88.4 Total102.3 101.098.1 96.8 117.9119.9 Both the City’s portion and the total tax capacity rates for Brooklyn Center residents are significantly higher than the state-wide and metro area averages the last two years. These rates are higher than average due to a combination of factors, including lower than average property values, makeup of residential properties, and the use of tax increments within the City. -6- 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. Governmental funds include the General Fund and the special revenue, debt service, and capital project funds. We have also included the most recent comparative state-wide averages available from the State Auditor. The reader needs to consider the effect of inflation and other known changes or differences when comparing this data. 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 The amounts received from the typical major sources of revenue will naturally vary between cities based on their particular situation. This would include the City’s stage of development; location, size, and density of its population; property values; services it provides; and other attributes. The following table presents the per capita revenue of the City’s governmental funds for the past three years, together with comparative state-wide averages: Governmental Funds Revenue per Capita With State-Wide Averages by Population Class State-Wide City of Brooklyn Center December 31, 2007 Yea200620072008 r 20,000–100,00027,90127,90127,907 Population2,500–10,00010,000–20,000 Property taxes333$ 332$ $ 413353$ 433$ 444$ 9556 98 104 Tax increments46 52 Franchise fees and other taxes22 32 5035 49 45 4473 49 46 Special assessments89 54 2637 24 23 Licenses and permits33 28 Intergovernmental revenues273 267 85169 114 79 2682 25 27 Chares for services106 88 g Other126 108 84113 79 53 Total revenue1,028$ 961$ $ 823918$ 871$ 821$ The City relies more on property tax revenue for its governmental funds revenue compared to the average Minnesota city. The City continues to generate significantly more tax increment revenue per capita than average, as it has made extensive use of this tool to finance commercial development. However, because the City is a mature suburb, it generates less special assessment revenue (typically used for new development). The City’s per capita governmental funds revenue for 2008 was $821, a decrease of about 5.7 percent from the prior year. This was primarily the result of the decrease in intergovernmental revenue and other revenue. The decrease in intergovernmental revenue, which decreased $35 per capita, was mainly due to significantly less LGA received. With the decline in the market, investment earnings decreased compared to the prior year, causing other revenue to decrease $26 per capita. -7- Governmental Funds Expenditures 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, which are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. Debt Service – Although the expenditures for the 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 per capita governmental funds expenditures 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 State-Wide City of Brooklyn Center December 31, 2007 Year200620072008 20,000–100,00027,90127,90127,907 Population2,500–10,00010,000–20,000 Current General government $ 10283$ 106$ 128$ $ 106122$ Public safety 224208 262223 271 288 Street maintenance 105110 6594 83 77 Parks and recreation 7982 83 86 8362 All other 9885 4897 192 259 $ 556579$ 735$ 838$ $ 616587$ Capital outla y $ 212328$ 162$ 162$ and construction481$ 341$ Debt service Principal $ 133161$ $ 112100$ 100$ 103$ Interest and fiscal 4771 4539 41 41 $ 157139$ 141$ 144$ $ 180232$ The City’s governmental funds current per capita expenditures are higher than state-wide averages for cities in the same population class. The City’s current operating costs are higher than average mostly related to higher than average public safety costs. The City’s per capita current expenditures increased significantly in 2008 as the City expended significant funds in Tax Increment District #3 for acquisition and development of properties within the City. Debt service costs per capita are very comparable to averages for other cities state-wide. -8- FINANCIAL TRENDS AND ANALYSIS F G 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 operations, police and fire protection, building inspection, streets and highway maintenance, and parks and recreation. The graph below illustrates the change in the General Fund financial position over the last six years. We have also included an expenditure line to reflect the change in the size of the General Fund operation over the same period. General Fund Financial Position Year Ended December 31, $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 200320042005200620072008 Fund Balance Cash Balance (Net of Interfund Borrowing) Expenditures The City’s General Fund cash and investments balance (net of interfund borrowing) at December 31, 2008 was $8,286,381, which decreased $191,636 from 2007. Total fund balance at December 31, 2008 was $7,743,438, down $198,976 from the prior year. Having an appropriate fund balance is an important factor in assessing the City’s financial health because a government, like any organization, requires a certain amount of equity to operate. Generally, the amount of equity required typically increases as the size of the operation increases. 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 can be a factor in determining the City’s bond rating and resulting interest costs. The City currently has an operating fund reserve policy that states the General Fund will manage its cash flow by having a targeted unreserved General Fund balance at the end of the fiscal year of between 50 percent and 52 percent of next year’s General Fund budgeted expenditures. At December 31, 2008, the City’s General Fund had a fund balance of 48.3 percent of the City’s annual General Fund expenditures, based on 2008 expenditure levels. -9- The following graph reflects the City’s General Fund reliance on its revenue sources for 2008: General Fund Revenue Taxes Licenses/Permits Intergovernmental Charges for Services Other ActualBudget Total General Fund revenues for 2008 were $15,027,144, a decrease of $561,777 or 3.6 percent from the previous year, and $471,692 (3.0 percent) under the final budget. Intergovernmental revenues were under budget by $539,736 due to the City receiving less LGA than budgeted. Licenses and permits were also under budget by $80,109 due to the building and mechanical permits being lower then expected. The following graph presents the City’s General Fund revenue sources for the last six years. The graph reflects a common trend experienced by Minnesota cities over the past few years with decreased or minimal increases in state aids. This trend forces a higher reliance on taxes and other sources to fund the natural increases in costs over time. General Fund Revenue by Source Year Ended December 31, $13,500,000 $12,000,000 $10,500,000 $9,000,000 $7,500,000 $6,000,000 $4,500,000 $3,000,000 $1,500,000 $– 200320042005200620072008 TaxesIntergovernmentalOther The decrease in revenue in 2008 in the above graph was related to the decreases described above. Intergovernmental revenue decreased about $685,000 as LGA to the City decreased approximately $655,000 in 2008. -10- The following illustrations provide you with the components of the City’s General Fund spending for 2008 and for the past six years: General Fund Expenditures General Government Public Safety Public Works Parks and Recreation Other ActualBudget Total General Fund expenditures for 2008 were $16,023,895, an increase of $655,331 (4.3 percent) from the prior year, and $184,941 (1.1 percent) less than budget. General Fund Expenditures by Function Year Ended December 31, $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $– 200320042005200620072008 General GovernmentPublic SafetyPublic WorksParks and RecreationOther General Fund expenditures increased in all the departments with the largest increases being in the public safety department by approximately $404,000 or 5.5 percent mainly related to increases in personnel costs for police protection and general government by about $325,000 or 10.9 percent related to increases in personnel costs, legal fees, election judge costs, heating expenses, and building repairs. -11- UF TILITY UNDS The utility funds comprise a considerable portion of the City’s activities. These funds significantly help to defray overhead and administrative costs and provide additional support to general government operations by way of annual transfers. We understand the City is proactive in reviewing these activities on an ongoing basis and we want to reiterate the importance of continually monitoring these operations. Over the years we have emphasized to our city clients the importance of these utility operations being self-sustaining, preventing additional burdens on general governmental funds. This would include the accumulation of net assets for future capital improvements and to provide a cushion in the event of a negative trend in operations. Water Fund The following graph presents six years of operating results for the Water Fund: Water Fund Year Ended December 31, $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) 200320042005200620072008 Operating Revenue Operating Expenses Operating Income (Loss) The Water Fund ended 2008 with net assets of $11,746,572, an increase of $280,452 from the prior year. Of this, $8,759,388 represents the investment in utility distribution system capital assets, leaving $2,987,184 of unrestricted net assets. Water Fund operating revenue was $1,967,534 for 2008, a decrease of $72,145 mostly due to a decrease in consumption during 2008. The City also changed utility billing systems in 2008. Previously, all penalty revenue was coded to the Water Fund, but the new system allows the City to code penalty charges to each respective fund causing revenue in the Water Fund to decrease. Operating expenses were $58,164 more than last year. -12- Sanitary Sewer Fund The following graph presents six years of operating results for the Sanitary Sewer Fund: Sanitary Sewer Fund Year Ended December 31, $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $– $(500,000) 200320042005200620072008 Operating Revenue Operating Expenses Operating Income (Loss) The Sanitary Sewer Fund ended 2008 with net assets of $12,763,481, an increase of $328,974 from the prior year. Of this, $9,596,222 represents the investment in the sanitary sewer capital assets, leaving $3,167,259 of unrestricted net assets. Sanitary Sewer Fund operating revenues for 2008 were $3,264,115, about $8,413 lower than last year. The slight decrease in revenue is due to a combination of decreased consumption and an increase in rates in 2008. Operating expenses for 2008 were $3,007,199, an increase of $75,191 from the prior year. This increase is mostly related to an increase in fees from Metropolitan Council Environmental Services for sewer treatment services. -13- Storm Drainage Fund The following graph presents six years of operating results for the Storm Drainage Fund: Storm Drainage Fund Year Ended December 31, $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $– 200320042005200620072008 Operating Revenue Operating Expenses Operating Income (Loss) The Storm Drainage Fund ended 2008 with net assets of $17,900,117, an increase of $1,904,082 from the prior year. Of this, $15,604,876 represents the investment in capital assets, leaving $2,295,241 of unrestricted net assets. Storm Drainage Fund operating revenues for 2008 were $1,553,036, about $140,488 higher than last year. Most of the increase relates to an increase in rates in 2008. Also, due to the new billing system, penalty revenue is now allocated to each fund, which was part of the increase in revenue in 2008. Operating expenses for 2008 were $1,155,241, about $30,566 higher than the prior year. Much of this increase relates to the increase in depreciation expense in the current year. -14- OEF THERNTERPRISE UNDS Liquor Fund The following graph presents six years of operating results for the Liquor Fund: Liquor Fund Year Ended December 31, $6,000,000 $5,500,000 $5,000,000 $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 $– 200320042005200620072008 Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Fund ended 2008 with net assets of $1,939,204, an increase of $270,720 from the prior year. Of the net asset balance, $48,206 represents the investment in liquor capital assets, leaving $1,890,998 of unrestricted net assets. Liquor sales for 2008 were $5,484,529, about $9,895 (0.2 percent) more than last year. Sales have steadily increased over the last several years, increasing by about 36 percent since 2004. The Liquor Fund generated operating income of $365,989 in 2008, or about 6.7 percent of gross sales compared to 5.8 percent of gross sales in fiscal 2007. The Liquor Fund gross profit margin has been similar for the last several years, ranging from 23.7 percent to 27.1 percent between 2004 and 2008. Operating expenses for 2008 were $1,120,842, about $89,000 or 8.6 percent higher than last year. -15- Earle Brown Heritage Center Fund The following graph presents six years of operating results for the Earle Brown Heritage Center Fund: Earle Brown Heritage Center Fund 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 $– $(500,000) $(1,000,000) 200320042005200620072008 Sales and User Fees Operating Expenses Cost of Sales Operating Income (Loss) The Earle Brown Heritage Center Fund ended 2008 with net assets of $7,454,587, a decrease of $313,440 from the prior year. Of the net asset balance, $6,489,694 represents investments in Earle Brown Heritage Center capital assets, leaving $964,893 of unrestricted net assets. Earle Brown Heritage Center Fund sales and user fees for 2008 were $3,831,972, about $493,324 (11.4 percent) less than last year. Operating expenses for 2008 were $2,395,926, a decrease of $35,986 from the prior year. -16- Golf Course Fund The following graph presents six years of operating results for the Golf Course Fund: Golf Course Fund Year Ended December 31, $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $– $(50,000) $(100,000) 200320042005200620072008 Operating Revenue Operating Expenses Operating Income (Loss) The Golf Course Fund ended 2008 with net assets of $874,676, a decrease of $46,446 from the prior year. Of this, $1,660,857 represents the investment in golf course land and capital assets, leaving a deficit of ($786,181) of unrestricted net assets. Golf Course Fund operating revenues for 2008 were $253,824, about $1,204 more than last year. Operating expenses for 2008 were $301,140, down $13,116 from the prior year. On an annual basis, this fund has had to borrow from other funds to fund cash flow needs. This interfund borrowing was a total of $792,488 at December 31, 2008. We recommend that the City continue to monitor the financial results in this fund. We also recommend that the City continue to update the long-range financial plan for this fund, including progress toward having adequate resources for the payback of interfund borrowing. -17- G-WFS OVERNMENTIDEINANCIAL TATEMENTS The City’s financial statements include fund-based information that focuses on budgetary compliance, and the sufficiency of the City’s current assets to finance its current liabilities. The GASB Statement No. 34 reporting model also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. Statement of Net Assets The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Assets divides the net assets into three components: net assets invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. The following table presents the City’s net assets as of December 31, 2008 for governmental activities and business-type activities: GovernmentalBusiness-Type Total ActivitiesActivities Net assets Current and other assets57,191,433$ 11,315,281$ 68,506,714$ pital assets39,386,221 42,572,360 81,958,581 Net book value of ca (6,112,138)(848,362)(6,960,500) Current liabilities g-term liabilities (26,500,403) –(26,500,403) Lon $ 53,039,27963,965,113$ 117,004,392$ Total net assets Net assets Invested in capital assets, net of related debt$ 42,572,36031,423,905$ 72,993,581$ Restricted31,850,784 31,850,784– Unrestricted690,424 10,466,919 12,160,027 $ 53,039,27963,965,113$ 117,004,392$ Total net assets The City’s total net assets at December 31, 2008 were $2,441,307 higher than at the beginning of the year, not including a prior period adjustment to correct capital assets and land held for resale balances in fiscal 2008. It also does not include the increase in net assets related to the change in accounting principle due to the implementation of GASB Statement No. 45, “Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions.” The amount invested in capital assets, net of related debt decreased by $995,992 in fiscal 2008. Restricted and unrestricted net assets increased about $3,437,299. At the end of the current fiscal year, the City is able to present positive balances in all three categories of net assets, both for the City as a whole, as well as for its separate governmental and business-type activities. The same situation held true for the prior fiscal year. -18- ACCOUNTING AND AUDITING UPDATES GASBSN.45–AFRE TATEMENT OCCOUNTING AND INANCIAL EPORTING BY MPLOYERS FOR P-EBOTP OSTMPLOYMENT ENEFITSTHER HANENSIONS This statement provides new guidance on accounting and reporting for post-employment benefits other than pensions by employers when the plan is not accounted for in their financial statements. OPEB refer to non-pension benefits provided after the termination of employment. One example of this type of benefit is healthcare premiums paid by employers on behalf of former employees. Governmental entities have traditionally accounted for OPEB on a pay-as-you-go basis, with only a few governments funding these benefits in advance of payment. The guidance in this statement rests on the assumption that OPEB liabilities should be accrued as they are earned by employees providing service to the entity. Under GASB Statement No. 45, governments offering OPEB will recognize the cost of these benefits using a three-step approach. The government will be required to project future benefits, discount those benefits to their present value, then use an acceptable actuarial method to allocate costs to individual accounting periods. Once calculated, the difference between the present value of OPEB benefits earned by employees as the result of past service and resources set aside to pay those benefits will be considered the “unfunded actuarial liability for OPEB.” Every employer will be allowed to start fresh at the time of transition to the new standard. There will be no requirement for an employer to recognize an accounting liability for underfunding prior to the implementation of the new standard. Instead, the unfunded actuarial accrued liability for OPEB at transition would be amortized over 30 years. As long as an employer funds the full amount of the actuarially determined annual required contribution (ARC) for these benefits each year, no asset or liability will be reported on the Statement of Net Assets. However, an employer will need to report a “net pension obligation” on its Statement of Net Assets as an asset or liability if it contributes more or less, respectively, than the ARC each year. Nothing in the statement is intended to alter the normal application of modified accrual accounting in the governmental funds of the entity. Thus, in governmental funds, OPEB expenditures normally would be recognized when the benefits are due and payable rather than when benefits are earned. The guidance will require that actuarial valuations for OPEB occur at least every two years for plans with 200 or more members, and every 3 years for plans with fewer than 200 members. A sole employer plan with fewer than 100 plan members has the option to apply a simplified alternative measurement method rather than obtain actuarial valuations. The statement will become effective in three phases based on the same criteria as those defined for the implementation of GASB Statement No. 34. GASB Statement No. 45 will be phased in for cities over a three-year period, which started with category one cities in the fiscal year ending December 31, 2007. GASBSN.47–ATB TATEMENT OCCOUNTING FOR ERMINATIONENEFITS GASB Statement No. 47 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 of termination benefits be accounted for in the same manner and is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements. GASB Statement No. 47 is effective for financial statements for periods beginning after June 15, 2005, or may be implemented simultaneously with GASB Statement No. 45, depending on your circumstances. -19- SN.50–PD–AGASBS GASB TATEMENT OENSIONISCLOSURES AN MENDMENT OF TATEMENT N.2527 OS AND This statement expands the disclosure requirements for pension plans, similar to those requirements in GASB Statement Nos. 43 and 45. This will require additional discussion on funding status, use of assumptions, and the determination of contribution rates. This statement is effective for cities for the year ended December 31, 2008. GASBSN.51–AFRIA TATEMENT OCCOUNTING AND INANCIAL EPORTING FOR NTANGIBLE SSETS Governments possess many different types of assets that may be considered intangible assets, including easements, water rights, timber rights, patents, trademarks, and computer software. This statement requires that all intangible assets not specifically excluded by its scope provisions be classified as capital assets. The requirements in this statement improve financial reporting by reducing inconsistencies that have developed in accounting and financial reporting for intangible assets. These inconsistencies will be reduced through the clarification that intangible assets subject to the provisions of this statement should be classified as capital assets, and through the establishment of new authoritative guidance that addresses issues specific to these intangible assets given their nature. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. GASBSN.53–AFRD TATEMENT OCCOUNTING AND INANCIAL EPORTING FOR ERIVATIVE I NSTRUMENTS The guidance in this statement improves financial reporting by requiring governments to measure derivative instruments at fair value in their economic resources measurement focus financial statements. These improvements should allow users of those financial statements to more fully understand a government’s resources available to provide services. The disclosures provide a summary of the government’s derivative instrument activity and the information necessary to assess the government’s objectives for derivative instruments, their significant terms, and the risks associated with the derivative instruments. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. GASBSN.54–FBRGFT TATEMENT OUNDALANCEEPORTING AND OVERNMENTAL UNDYPE D EFINITIONS The objective of this statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The definitions of the general fund, special revenue fund type, capital projects fund type, debt service fund type, and permanent fund type are clarified by the provisions in this statement. The requirements are also intended to enhance the consistency between information reported in the government-wide statements and information in the governmental fund financial statements and avoid confusion about the relationship between reserved fund balance and restricted net assets. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2010. -20- INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS City Council and Residents City of Brooklyn Center, Minnesota 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 of Brooklyn Center (the City) as of and for the year ended December 31, 2008, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated May 26, 2009. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a misstatement of the City’s financial statements that is more than inconsequential will not be prevented or detected by the City’s internal control. We consider the deficiencies described in the accompanying Schedule of Findings and Responses as items 2008-1, 2008-2, 2008-3, 2008-4, 2008-5, and 2008-6 to be significant deficiencies in internal control over financial reporting. (continued) -1- -1- INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE WITH MINNESOTA STATE LAWS AND REGULATIONS City Council and Residents City of Brooklyn Center, Minnesota 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 of Brooklyn Center (the City) as of and for the year ended December 31, 2008, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated May 26, 2009. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the provisions of the Minnesota Legal Compliance Audit Guide for Local Governments, promulgated by the State Auditor pursuant to Minnesota Statute § 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. TheMinnesota Legal Compliance Audit Guide for Local Governments covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that, for the items tested, the City complied with the material terms and conditions of applicable legal provisions, except as noted in the Schedule of Findings and Responses. This report is intended solely for the information and use of the City Council, management of the City, and the state of Minnesota and is not intended to be, and should not be, used by anyone other than these specified parties. May 26, 2009 -3- -3- CITY OF BROOKLYN CENTER Schedule of Findings and Responses (continued) Year Ended December 31, 2008 B. FINDINGS MINNESOTA LEGAL COMPLIANCE 2008-6 OTHER POST-EMPLOYMENT BENEFITS (OPEB) (CONTINUED) Recommendation We recommend that the City improve documentation of the eligibility of retirees for other post-employment benefits for those that currently qualify for these benefits. We also recommend that the City consider clarifying the language in the City Council resolutions to make it less difficult to determine eligibility for these benefits for current employees. Management's Response There is no disagreement with the finding. The policy will be changed to require that retiring employees to whom the City's OPEB program may be available will be required to provide the human resources department with written proof from the Public Employees' Retirement Association (PERA) of Minnesota prior to the retirement date that the employee is eligible for full, unreduced PERA retirement benefits at the expected date of retirement. 2008-7 CLAIMS AND DISBURSEMENTS Criteria Minnesota Statute 471.425, Subd. 2. Condition Minnesota Statute 471.425, Subd. 2 requires cities to pay each vendor obligation according to the terms of each contract within 3 5 days after the receipt of the goods or services or the invoice for the goods or services. If such obligations are not paid within the appropriate time period, the City must pay interest on the unpaid obligations at the rate of 1.5 percent per month or part of a month. For one disbursement selected for testing, the City did not pay the obligation within the required time period, and did not pay interest on the unpaid obligation. Cause There was a timing delay from when the invoice was approved for payment, and when it was sent back to the finance department for payment. Effect Certain payments made to vendors were not paid within the timeframe as required by state statute, and the vendors were not paid the interest to which they were entitled. Recommendation We recommend that the City review the claims and disbursement payment procedures in place to ensure future compliance with this statute. Management's Response There is no disagreement with the audit finding. The incident was reviewed by management, the cause for the violation discovered, and the invoice payment process was passed reiterated to the appropriate staff. In the future, invoices exceeding the 3 5-day payment window will be paid with an additional 1.5 percent fee included as required by state law. -S-