Loading...
HomeMy WebLinkAbout2007 Audit Reports - MMKR Management Report for City of Brooklyn Center, Minnesota December 31, 2007 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 records for the year ending December 31, 2007. 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 27, 2008 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 described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. 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, 2007: We have issued an unqualified opinion on the City’s financial statements. We noted seven matters involving the City’s internal control over financial reporting that we consider to be significant deficiencies but not material weaknesses. These include the following findings: –Segregation of duties within utility billing, –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 asset 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 no findings based on our testing of the City’s compliance with Minnesota laws and regulations. -1- AP S IGNIFICANT CCOUNTING OLICIES The City’s management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City are described in Note 1 of the notes to basic financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year. As described in Note 5 F. of the City’s notes to basic financial statements, management has accounted for other post-employment healthcare benefit liabilities based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. Due to the fact that new governmental accounting standards issued to provide guidance on the accounting for these obligations is not required to be implemented as of the date of the financial statement, no authoritative guidance for the accounting of these obligations exists. However, management believes that the use of future estimated premium costs to estimate the liability is appropriate in this circumstance. The City did recognize in the financial statements a prior period adjustment to properly record capital assets between governmental and business-type activities and eliminate an asset that was double counted in the capital asset records. 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. A A 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 $287,756. Management has determined that the effects of this item is 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 is based on estimated useful lives of assets. Other Post-Employment Health Benefit Liabilities – Management’s estimates of health insurance liability is based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. Land Held for Resale – Management’s estimates of this asset is based on net realizable value (lower of cost or estimated sales price) -2- 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. MR ANAGEMENTEPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated May 27, 2008. 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. OCR THEROMMENTS AND ECOMMENDATIONS Based on our audit, we offer the following additional comments for the improvement of the City’s financial and accounting controls and procedures: New Auditing Standards As you may be aware, the audit process changed dramatically this year. Because of our extensive experience with Minnesota municipalities, we have always taken a very customized approach to auditing cities. We find this to be both an efficient and effective method to accomplish a quality audit. So much of what we do now is the same as what we have done in the past, with the addition of the new risk-based model or approach. The new model involves a much more thorough review, analysis, and documentation of the City’s environment, systems, procedures, and internal controls. This documentation includes a comparison of the City’s internal controls with a standard comprehensive framework for internal controls developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This process provides for an assessment of risk for material misstatement in the financial statements due to error or fraud, and those additional audit procedures we need to perform to address those risks. Although the intent of the new standards is to increase the quality of audits in our profession, a positive by-product is getting management and governance of the City more involved in reviewing and improving procedures and controls. This is very important, as the mayor, City Council, and management play critical roles in the City’s financial controls. -3- FUNDING CITIES IN MINNESOTA L EGISLATION The following is a brief summary of recent legislative activity affecting the finances of Minnesota cities: Local Government Aid (LGA) – Cities are still adapting to the formula changes for allocating LGA to cities that went into effect in 2004. The transition to the new formula has caused many cities to experience volatility in their aid payments from year-to-year. This is mainly due to the elimination of the grandfather clause, which guaranteed minimum payment amounts to cities. Market Value Homestead Credit (MVHC) –After severalyears of cuts, the MVHC reimbursement aid was restored in 2007 for all cities. PT ROPERTYAXES Our past few 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 has turned toward our current real estate and housing environment, mortgage foreclosures, and the world economy. Property values within Minnesota cities experienced average increases of 12.0 percent for taxes payable in 2006 and 11.0 percent for those payable in 2007. However, the valuation for taxes payable in 2007 is based on estimated values as of January 1, 2006, and a lot has happened to values since then. In comparison, the City’s market value increased by 3.9 percent in 2006 and 4.4 percent in 2007. The following graph shows the City’s changes in taxable market value over the past 10 years: Market Value $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $– 1998199920002001200220032004200520062007 -4- 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 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $– 1998199920002001200220032004200520062007 Although it is impossible to consider every aspect and variable of local government spending, average tax rates are often used as a benchmark. Rates expressed as a percentage of net tax capacit y All CitiesSeven-County City of State-WideMetro Area Brooklyn Center 200620072006200720062007 Averae tax rate g Cit 36.137.1 34.3 33.4 44.346.9 y Count 38.540.1 35.5 35.2 39.141.0 y School22.8 22.2 23.0 22.7 28.128.5 Special taxing5.4 5.5 5.8 6.8 8.48.2 Total105.4 102.398.6 98.1 119.9124.6 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. -5- 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, 2005 200520062007 Year Population2,500–10,00010,000–20,00020,000–100,00028,13727,90127,901 Property taxes283$ 276$ $ 414306$ 413$ 433$ Tax increments40 52 16650 95 98 4931 50 49 Franchise fees and other taxes15 23 4473 44 49 Special assessments88 69 2442 26 24 Licenses and permits43 33 89155 85 114 Intergovernmental revenues260 272 Charges for services116 95 2778 26 25 6376 84 79 Other125 108 $ 876811$ 823$ 871$ Total revenue970$ 928$ The City relies more on property tax revenue for its governmental fund revenues 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 fund revenue for 2007 was $871, an increase of about 5.8 percent from the prior year. The increase came mainly in property taxes and intergovernmental revenue. The increase in intergovernmental revenue, which increased $29 per capita, was mainly due to more LGA received. -6- 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 fund 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, 2005 Year 200520062007 Population2,500–10,00010,000–20,00020,000–100,00028,13727,90127,901 Current General government $ 103113$ $ 9278$ 102$ 106$ Public safety 249198 262 271 201192 Street maintenance 9497 7875 65 83 Recreation 7576 79 83 7657 All other 10576 6182 48 192 $ 555509$ 556$ 735$ $ 579535$ Capital outla y and construction438$ 335$ $ 296293$ 212$ 162$ Debt service Principal $ 99106$ 112$ 100$ $ 142157$ Interest and fiscal 4437 45 41 5061 $ 192218$ $ 143143$ 157$ 141$ The City’s governmental funds current per capita expenditures is 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 2007 as the City expended significant funds in Tax Increment District #3 for acquisition and development of properties within the District. Debt service costs per capita are very comparable to averages for other cities state-wide . -7- FINANCIAL TRENDS AND ANALYSIS GF ENERALUND The City’s General Fund accounts for the financial activity of the basic services provided to the community. The primary services included within this fund are the administration of the municipal 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 five 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, $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 20032004200520062007 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, 2007 was $8,478,017, which increased $386,568 from 2006. Total fund balance at December 31, 2007 was $7,942,414, up $433,224 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, 2007, the City’s General Fund had a fund balance of 51.7 percent of the City’s annual General Fund expenditures, based on 2007 expenditure levels. -8- The following graph reflects the City’s General Fund reliance on its revenue sources for 2007: General Fund Revenue Taxes Licenses/Permits Intergovernmental Charges for Services Other ActualBudget Total General Fund revenues for 2007 were $15,588,921, an increase of $1,173,839, or 8.1 percent, from the previous year, and $1,044,549 (7.2 percent) over the final budget. Intergovernmental revenues were over budget by $507,601 due to the City receiving more LGA than budgeted. Taxes were also in excess of budgeted amounts by $423,953 mostly related to the City receiving excess tax increment proceeds from the county related to a tax increment district the City decertified in fiscal 2007. The following graph presents the City’s General Fund revenue sources for the last five years. The graph reflects the City’s increasing reliance on taxes and user fees to finance its General Fund operations. General Fund Revenue by Source Year Ended December 31, $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 20032004200520062007 TaxesIntergovernmentalOther The increase in revenue in 2007 in the above graph was related to the increases described above as well as tax revenue increased about $637,000 relating to the MVHC that was restored in 2007. Intergovernmental revenue increased about $528,000 as LGA to the City increased almost $562,000 in 2007. -9- The following illustrations provide you with the components of the City’s General Fund spending for 2007 and for the past five years: General Fund Expenditures General Government Public Safety Public Works Parks and Recreation Other ActualBudget Total General Fund expenditures for 2007 were $15,368,564, an increase of $708,359 (4.8 percent) from the prior year, and only $48,692 or 0.3 percent more than the final 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 $– 20032004200520062007 General GovernmentPublic SafetyPublic WorksParks and RecreationOther General Fund expenditures increased in all the departments with the largest increases being in the public works department by around $258,000 or 15.1 percent and general government by about $236,000 or 8.6 percent. -10- 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 government 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 five years of operating results for the Water Fund: Water Fund Year Ended December 31, $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $– $(500,000) 20032004200520062007 Operating Revenue Operating Expenses Operating Income (Loss) The Water Fund ended 2007 with net assets of $11,466,120, an increase of $424,734 from the prior year. Of this, $8,645,312 represents the investment in utility distribution system capital assets, leaving $2,820,808 of unrestricted net assets. Water Fund operating revenue was $2,039,679 for 2007, up $158,225 mostly due to an increase in rates during 2007. Operating expenses were $83,568 more than last year. As the graph above illustrates, operating income has improved dramatically in the past two years. -11- Sanitary Sewer Fund The following graph presents five 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) 20032004200520062007 Operating Revenue Operating Expenses Operating Income (Loss) The Sanitary Sewer Fund ended 2007 with net assets of $12,434,507, an increase of $920,348 from the prior year. Of this, $9,053,907 represents the investment in the sanitary sewer capital assets, leaving $3,380,600 of unrestricted net assets. Sanitary Sewer Fund operating revenues for 2007 were $3,272,528, about $179,954 higher than last year. Most of the increase relates to an increase in rates in 2007. Operating expenses for 2007 were $2,932,008, down $253,642 from the prior year. This decrease is mostly related to a one-time expense for past sewer charges provided by Metropolitan Council Environmental Services that was settled and recorded in 2006. -12- Storm Drainage Fund The following graph presents five 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 $– 20032004200520062007 Operating Revenue Operating Expenses Operating Income (Loss) The Storm Drainage Fund ended 2007 with net assets of $15,996,035, an increase of $573,328 from the prior year. Of this, $14,287,918 represents the investment in capital assets, leaving $1,708,117 of unrestricted net assets. Storm Drainage Fund operating revenues for 2007 were $1,412,548, about $89,000 higher than last year. Most of the increase relates to an increase in rates in 2007. Operating expenses for 2007 were $1,124,675, about $169,000 higher than the prior year. Much of this increase relates to a $193,563 increase in depreciation expense in the current year. This increase is related to the prior period adjustment the City made in 2007 to appropriately record capital assets to the Storm Drainage Fund. -13- OTHERENTERPRISEFUNDS Liquor Fund The following graph presents five years of operating results for the Liquor Fund: Liquor Fund Year Ended December 31, $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $– 20032004200520062007 Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Fund ended 2007 with net assets of $1,668,484, an increase of $258,549 from the prior year. Of the net asset balance, $74,637 represents the investment in liquor capital assets, leaving $1,593,847 of unrestricted net assets. Liquor sales for 2007 were $5,474,634, about $316,000 (6.1 percent) more than last year. Sales have steadily increased over the last several years, increasing by about 61 percent since 2003. The Liquor Fund generated operating income of $317,055 in 2007, or about 5.8 percent of gross sales compared to 5.3 percent of gross sales in fiscal 2006. The Liquor Fund gross profit margin has been similar for the last several years ranging from 23.7 percent to 25.0 percent between 2003 and 2007. Operating expenses for 2007 were $1,031,763, about $69,000 or 7.1 percent higher than last year. -14- Earle Brown Heritage Center Fund The following graph presents five years of operating results for the Earle Brown Heritage Center Fund: Earle Brown Heritage Center Fund Year Ended December 31, $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $– $(1,000,000) 20032004200520062007 Sales and User Fees Operating Expenses Cost of Sales Operating Income (Loss) The Earle Brown Heritage Center Fund ended 2007 with net assets of $7,768,027, a decrease of $439,548 from the prior year. Of the net asset balance, $6,742,396 represents investments in heritage center capital assets, leaving $1,025,631 of unrestricted net assets. Earle Brown Heritage Center Fund sales and user fees for 2007 were $4,325,296, about $65,000 (1.5 percent) more than last year. Operating expenses for 2007 were $2,431,912, a decrease of $2,517 from the prior year. Although improving, this fund has shown an operating (loss) for each of the past five years. -15- Golf Course Fund The following graph presents five 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) 20032004200520062007 Operating Revenue Operating Expenses Operating Income (Loss) The Golf Course Fund ended 2007 with net assets of $921,122, a decrease of $58,073 from the prior year. Of this, $1,662,722 represents the investment in golf course land and capital assets, leaving a deficit of ($741,600) of unrestricted net assets. Golf Course Fund operating revenues for 2007 were $252,620, about $2,281 more than last year. Operating expenses for 2007 were $314,256, up $28,192 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 has increased to a total of $792,488 at December 31, 2007. We recommend the City continue to monitor the financial results in this fund. We also recommend the City continue to update the long-range financial plan for this fund, including progress toward having adequate resources for the payback of interfund borrowing. -16- G-WFS OVERNMENTIDEINANCIAL TATEMENTS The City’s financial statements include fund-based information that focuses on budgetary compliance, and the sufficiency of the City’s current assets to finance its current liabilities. The Governmental Accounting Standards Board (GASB) Statement No. 34 reporting model also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. Statement of Net Assets The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Assets divides the net assets into three components: net assets invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. The following table presents the City’s net assets as of December 31, 2007 for governmental activities and business-type activities: GovernmentalBusiness-Type Total ActivitiesActivities Net assets Current and other assets53,317,384$ 10,691,788$ 64,009,172$ pital assets38,007,002 40,466,892 78,473,894 Net book value of ca (4,606,886) (846,536)(5,453,422) Current liabilities g-term liabilities (26,137,238) –(26,137,238) Lon $ 50,312,14460,580,262$ 110,892,406$ Total net assets Net assets Invested in capital assets, net of related debt$ 40,466,89230,780,590$ 70,318,894$ Restricted21,738,515 21,738,515– Unrestricted8,061,157 9,845,252 18,834,997 $ 50,312,14460,580,262$ 110,892,406$ Total net assets The City’s total net assets at December 31, 2007 were $4,903,220 higher than at the beginning of the year not including a prior period adjustment to correct capital asset balances in fiscal 2007. The amount invested in capital assets, net of related debt increased by $5,014,262 in calendar 2007. Restricted and unrestricted net assets decreased about $228,000. 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 government as a whole, as well as for its separate governmental and business-type activities. The same situation held true for the prior fiscal year. -17- ACCOUNTING AND AUDITING UPDATES GASBSN.43–FRP-EBP TATEMENT OINANCIAL EPORTING FOR OSTMPLOYMENTENEFITLANS OTPPGASBSN.45–AF THERHANENSIONLANS AND TATEMENT OCCOUNTING AND INANCIAL REP-EBOTP EPORTING BY MPLOYERS FOR OSTMPLOYMENTENEFITSTHERHANENSIONS These related statements provide new guidance on accounting and financial reporting of post-employment benefits accounted for in trust funds included in the financial statements of plan sponsors or employers, and employer accounting and reporting for post-employment benefits other than pensions by employers when the plan is not accounted for in their financial statements. Other post-employment benefits (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. Only a few governments have funded these benefits in advance of payment. The guidance in these statements rests on the assumption that OPEB should be accrued as an expense as service is provided by employees. For governments offering OPEB, the cost would be recognized 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 under-funding 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 required contribution, no asset or liability will be reported on the Statement of Net Assets. However, an employer will need to report an asset or liability if the contributions are less or more than the annual required contribution each year. Nothing in the documents is intended to alter the normal application of modified accrual accounting in the governmental funds of the entity. Thus, OPEB expenditures normally would be recognized when payments are made to the former employees 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 three 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. These statements 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. 43 is phased in for cities over a three-year period, which started with category one cities in the fiscal year ended December 31, 2006. GASB Statement No. 45 is phased in over a three-year period, which started with category one cities in the fiscal year ended December 31, 2007. -18- 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, 2007, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated May 27, 2008. 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 2007-1, 2007-2, 2007-3, 2007-4, 2007-5, 2007-6, and 2007-7 to be significant deficiencies in internal control over financial reporting. (continued) -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, 2007, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated May 27, 2008. 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. 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 27, 2008 -3- CITY OF BROOKLYN CENTER Schedule of Findings and Responses (continued) Year Ended December 31, 2007 A. FINDINGS INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) 2007 -7 OTHER POST EMPLOYMENT BENEFITS Criteria Management is responsible for establishing and maintaining effective internal controls. These internal controls include the maintenance of accounting records to support the amounts and disclosures in the City's financial statements. Condition —The City provides other post employment healthcare benefits for certain retirees. The City determines eligibility for this benefit based on requirements outlined in City Council resolutions. There are two methods whereby employees can quality for this benefit. During our audit we were unable to obtain documentation of the eligibility for this benefit for certain employees who are currently receiving this benefit. We also noted that one of the methods the City uses to determine eligibility is difficult to verify as its criteria is based on another organizations eligibility requirements that are outside the control of the City. Cause —The City does not have adequate documentation of the eligibility of retirees for other post employment benefits and certain eligibility requirements of city employees for retiree benefits are difficult to determine. Effect —The City may be paying other post employment benefits to retirees that do not qualify or could have difficulty determining eligibility for these benefits for current employees based on current written eligibility standards. Recommendation We recommend the City improve documentation of the eligibility of retirees for other post employment benefits for those that currently qualify for this benefit. We also recommend 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 audit finding. B. FINDINGS MINNESOTA LEGAL COMPLIANCE None. -8-