HomeMy WebLinkAbout2010 Management Report - MMKR Management Report
for
City of Brooklyn Center, Minnesota
December 31, 2010
PRINCIPALS
'17humas M. Monza e, CPA
Thomas A, Karnowski, CPA
M R Paul A. Radosevich, CPA
Williani.l. Lauer, CPA
C E R T I F I E D PUBLIC J =cs H. Eichren, CPA
A C C 0 U N T A N T S Aaron J . Nielsen. CPA
Victoria L. Holinka, CPA
To the Cit Council and Mana
Cit of Brookl Center, Minnesota
We have prepared this mana report in conjunction with our audit of the Cit of Brookl Center's
(the Cit financial statements for the y ear endin December 31, 2010. The purpose of this report is to
communicate information relevant to cit finances in Minnesota and to provide comments resultin from
our audit process. We have or this report into the followin sections:
• Audit Summar
• Fundin Cities in Minnesota
• Governmental Funds Overview
• Financial Trends and Conditions of Selected Funds
• Accountin and Auditin Updates
We would be pleased to further discuss an of the information contained in this report or an other
concerns that y ou would like us to address. We would also like to express our thanks for the courtes and
assistance extended to us durin the course of our audit.
This report is intended solel for the information and use of mana those char with g overnance
of the Cit and those who have responsibilit for oversi of the financial reportin process and is not
intended to be, and should not be, used b an other than these specified parties.
0 0 kA U4 4 t ect J 40 "CO4�
Ma 26, 201
Malio Monta Karnowski, Radosevich & Co., P.A-
5353 Wa 'Boulevard -* Su iic x+ # M iniicapolis, MN '554 -v Tclephonc. 952,545 -0 4 s Te[cfax. 952-545-0569 a www.tnmkr.com
AUDIT SUMMARY
The following is a summary of our audit work, key conclusions, and other information that we consider
important or that is required to be communicated to the City Council, administration, or those charged
with governance of the City.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA, GOVERNMENT A UDITING STANDARDS, AND THE U.S. OFFICE OF
MANAGEMENT AND BUDGET (OMB) CIRCULAR A -133
We have audited the financial statements of the governmental activities, the business -type activities, each
major fund, and the aggregate remaining fund information of the City as of and for the year ended
December 31, 2010. Professional standards require that we provide you with information about our
responsibilities under auditing standards generally accepted in the United States of America, Government
Auditing Standards, and OMB Circular A -133, as well as certain information related to the planned scope
and timing of our audit. We have communicated such information to you verbally and in our audit
engagement letter. Professional standards also require that we communicate the following information
related to our audit.
PLANNED SCOPE AND TIMING OF THE AUDIT
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.
AUDIT OPINION AND FINDINGS
Based on our audit of the City's financial statements for the year ended December 31, 2010:
• We have issued an unqualified opinion on the City's basic financial statements.
• We reported no matters involving the City's internal control over financial reporting that we
consider to be material weaknesses.
• The results of our testing disclosed no instances of noncompliance that are required to be reported
under Government Auditing Standards.
• We noted that the Schedule of Expenditures of Federal Awards is fairly stated, in all material
respects, in relation to the basic financial statements.
• We noted no matters involving the internal control over compliance and its operation that we
consider to be material weaknesses in our testing of major federal programs.
• The results of our tests indicate that the City has complied, in all material respects, with the
compliance requirements that could have a direct and material effect on each major federal
program.
• We have reported no findings based on our testing of the City's compliance with Minnesota laws
and regulations.
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FOLLOW -UP ON PRIOR YEAR FINDINGS
As a part of our audit of the City's financial statements for the year ended December 31, 2010, we
performed procedures to follow -up on the findings that resulted from our prior year audit. The following
is a summary of prior year findings along with the results of our follow -up procedures:
During the 2009 audit, we reported that the City did not record a payable for an invoice that was
discovered during our search for unrecorded liabilities. An adjusting journal entry was made to properly
record the payable as of year -end. In the current year, we noted no instances of this and we have
eliminated this finding.
We also reported that there was a lack of management approval of payroll transactions. During the 2010
fiscal year, the City implemented procedures improving the controls over the approval of payroll
transactions. As a result of this, we have eliminated this finding.
SIGNIFICANT ACCOUNTING POLICIES
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. No
new accounting policies were adopted and the application of existing policies was not changed during the
year.
We noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in
the proper period.
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are trivial, and communicate them to the appropriate level of management.
We proposed one uncorrected audit adjustment to the financial statements for the reporting of
governmental activities unamortized discounts on bond proceeds totaling $150,546. Management has
determined that the effects of these items are immaterial, both individually and taken together, to each
opinion unit's financial statements taken as a whole.
ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS
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 of the City include the following:
• 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.
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Fire Relief Net Pension Obligation — Actuarial estimates of the net pension obligation is based
on eligible participants, estimated retirement dates, and estimated disability rates.
Compensated Absences — Management's estimate is based on current rates of pay and sick leave
balances.
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 evaluated the key factors and assumptions used by management in the areas discussed
above in determining that they are reasonable in relation to the financial statements taken as a whole.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
DISAGREEMENTS WITH MANAGEMENT
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.
MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 26, 2011.
MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the City's 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.
OTHER AUDIT FINDINGS OR ISSUES
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.
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FUNDING CITIES IN MINNESOTA
LEGISLATION
The following is a summary of significant legislative activity passed in calendar year 2010 affecting the
finances of Minnesota cities:
Local Government Aid and Market Value Homestead Credit — The 2009 legislative session
ended without an agreement on how to address significant projected state budget deficits for the 2009
and 2010 fiscal years. The Governor vetoed the budget bill proposed by the Legislature and balanced
the budget using his power of unallotment. The Governor's unallotment plan included delays in the
payment of state revenues to school districts, and a reduction in appropriations to other state
programs, including local government aid (LGA) and market value homestead credit (MVHC) to
Minnesota cities. The unallotments included reductions of approximately $128 million to calendar
year 2010 LGA and MVHC, calculated at 7.64 percent of the total calendar year 2009 aggregated
levy and LGA of the city, not to exceed $55 per capita. Cuts were to be first taken from LGA and
then from MVHC, as necessary. Cities with populations below 1,000 and below the state -wide
average tax base per capita were exempted from these cuts.
The February 2010 state budget forecast predicted an additional shortfall of $994 million for the
remainder of the 2010 -2011 biennium. The 2010 Legislature passed a supplemental budget bill in
April that addressed roughly $312 million of the additional shortfall. The bill reduced fiscal 2010
LGA and MVHC for cities by an additional $52.5 million, calculated at 3.43 percent of the total 2010
aggregated levy, LGA, and taconite aid of the city, not to exceed $28 per capita. These cuts were to
be first taken from MVHC and then from LGA, as necessary. Cities with populations below 1,000
exempted from previous LGA and MVHC cuts were included in this round of cuts.
The April 2010 supplemental budget bill also reduces city LGA and MVHC for fiscal 2011 by
$56.5 million. About $25.4 million of this reduction is a permanent extension of the MVHC portion
of the cuts originally made through the Governor's unallotments. The Legislature also made a
permanent reduction of $31.1 million to the state's annual LGA appropriation for cities, beginning in
2011.
In May 2010, the Minnesota Supreme Court issued a ruling on a lawsuit overturning the Governor's
unallotment of funding to a state special nutrition program. The decision, which applied only to the
cuts to this specific program, called into question all of the Governor's July 2009 unallotments. In a
one -day special session in May, the 2010 Legislature took action to ratify the majority of the
Governor's 2010 unallotments, and dealt with the remaining projected shortfall.
Levy Limitations — A 2008 law limited general operating property tax levy increases for cities with
populations over 2,500 to an inflationary increase based on the state determined implicit price deflator
(IPD) to a maximum of 3.9 percent annually for the next three calendar years. Modifications were
made in subsequent legislative sessions to allow cities subject to levy limitation to declare "special
levies" to replace the LGA and MVHC losses described above. The 2010 Legislature also established
a floor of zero percent for the inflationary increase, so levies would not be reduced in the event of
IPD deflation. The Governor's proposal to extend levy limits was not adopted by the
2010 Legislature, and levy limits remain set to expire after the 2011 tax year. However, the extension
of levy limits is expected to be revisited by the 2011 Legislature.
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State Stimulus /Jobs Bill — This jobs creation bill included a number of provisions that applied to
cities, including:
• Authority for local governments to finance energy conservation improvements and collect
repayments as special assessments at the request of the property owner.
Creation of a new "compact development" type of tax increment financing (TIF) district.
• Expanded authority to use TIF for general economic development for one year.
• Expanded authority to use excess TIF to finance new private development.
• Expanded authority for certain cities to use TIF for housing replacement in response to the
foreclosure crisis.
Interest Rates on Awards and Judgments — The 2010 Legislature exempted government entities
from a 2009 law change that increased the required interest rate on awards and judgments over
$50,000 to 10 percent, returning the rate to the pre -2009 maximum of the greater of 4 percent or the
secondary market rate of one year U.S. Treasury bills as determined in December each year.
Pension Funding and Sustainability — The 2010 Legislature made a number of changes to improve
the sustainability of state -wide pension plans, including those administered by the Public Employees
Retirement Association (PERA). Among the changes to the Public Employee Retirement Fund
Coordinated Plan were required increases to the employer and employee contribution rates of
0.25 percent of salary each, effective January 1, 2011. Public Employee's Police and Fire Fund
employee and employer contribution rates also increased 0.2 percent and 0.3 percent of salary,
respectively, effective January 1, 2011.
STATE OUTLOOK AND IMPORTANCE OF INTERNAL CONTROLS
The state of Minnesota has experienced a series of major budget shortfalls and a steadily deteriorating
financial condition in recent years. Local governments and other entities dependent on the state for
funding have, in turn, had to deal with the resulting state aid cuts, holdbacks, and unallotments. For the
fiscal year 2010 -2011 biennium, the state budget was balanced using several large accounting "shifts"
and one -time federal stabilization funds that greatly reduced the amount of actual aid reductions
necessary. The accounting shifts included delaying state aid payments to and accelerating property tax
revenue recognition of Minnesota school districts, essentially utilizing cash "borrowed" from the districts
to help balance the state budget. The state intends to pay these shifts back when it has the financial
ability.
Current state budget projections for 2011 -2012 predict further significant shortfalls that will need to be
addressed. Realistically, the state has already used up most of the accounting shifts available for this
purpose, and additional federal assistance cannot be counted on. The economy, while showing some
signs of recovery, is unlikely to turn around quickly enough to solve the state's budget issues in the
short -term. All of this adds up to a period of continued financial uncertainty and a strong likelihood of
further funding cuts for Minnesota municipalities.
These circumstances have resulted in a sustained cycle of budget reductions for most Minnesota cities.
Among our clients, we have seen numerous examples of staffing cuts and reassignments that have
potentially weakened internal controls by reducing the segregation of accounting duties or delaying the
performance of key control procedures. Unfortunately, the economic downturn has also placed additional
financial strain on many individuals, elevating the risk of fraud and theft. Recent communications from
the Minnesota Office of the State Auditor have reported a substantial increase in incidents of fraud and
theft involving local governments reported to their office recently. A sound system of internal controls is
critical to safeguarding city assets and assuring that accurate and timely financial information is available
to manage the City. When faced with difficult budgetary decisions, we encourage our clients to remain
mindful of these factors and to continue to make sound financial controls a top priority.
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PROPERTY TAXES
Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In
recent years, this dependence has been heightened, as revenue from state aids and fees related to new
development have dwindled due to the struggling economy. This has placed added pressure on local
taxpayers already beset by higher unemployment, lower property values, and tighter credit markets. As a
result, municipalities in general are experiencing increases in tax delinquencies, abatements, and
foreclosures. This instability has led to significant fiscal challenges for many local governments, and
increased the investing public's concerns about the security of the municipal debt market.
Property values within Minnesota cities experienced an average increase of 1.5 percent for taxes payable
in 2009 and an average decrease of 3.0 percent for those payable in 2010, reflecting the weak housing
market and economic recession experienced in recent years. In comparison, the City's market value
decreased 9.4 percent and 4.7 percent in 2010 and 2009, respectively. It is important to remember that the
2010 market value is based on estimated values as of January 1, 2009, 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 1 500 1 000 1 000
$2
$1
$1
$500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Tax capacity is considered the actual base available for taxation. It is calculated by applying the state's
property classification system to each property's market value. Each property classification, such as
commercial or residential, has a different calculation and uses different rates. Consequently, a city's total
tax capacity will change at a different rate than its total market value, as tax capacity is affected by the
proportion of the City's tax base that is in each property classification from year -to -year, as well as
legislative changes to tax rates. The City's tax capacity decreased 3.4 percent and 2.7 percent for taxes
payable in 2010 and 2009, respectively.
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The following graph shows the City's change in tax capacities over the past 10 years:
Local Tax Capacity
$30 1 000 1 000
$25
$20
$15
$10
$5,000,000
Li .3 14di
$-
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The following table presents the average tax rates applied to city residents for each of the last two levy
years, along with comparative state -wide and metro area rates. The general increase in rates reflects both
the increased reliance of local governments on property taxes and the recent decline in tax capacities
previously discussed.
Rates expressed as a percentage of net tax capacity
All Cities Seven - County City of
State -Wide Metro Area Brooklyn Center
2009 2010 2009 2010 2009 2010
Average tax rate
City 36.9 39.2 33.7 36.0 47.5 51.1
County 39.3 41.0 34.7 36.8 40.4 42.6
School 22.0 23.0 22.1 24.0 29.0 32.7
Special taxing 5.5 5.9 5.9 6.5 8.8 9.5
Total 103.7 109.1 96.4 103.3 125.7 135.9
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.
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GOVERNMENTAL FUNDS OVERVIEW
This section of the report provides you with an overview of the financial trends and activities of the City's
governmental funds. Governmental funds include the General Fund, 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. In addition, 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 City's revenue per capita of its governmental funds for the past three years, together with
state -wide averages:
Governmental Funds Revenue per Capita
With State -Wide Averages by Population Class
State -Wide City of Brooklyn Center
Year December 31, 2009 2008 2009 2010
Population 2,500- 1000 1000- 2000 20 100 30 29 30
Property taxes $ 367 $ 365 $ 391 $ 409 $ 433 $ 432
Tax increments 46 62 59 95 121 103
Franchise fees and other taxes 23 34 36 42 42 45
Special assessments 86 47 62 43 45 50
Licenses and permits 21 19 27 21 21 35
Intergovernmental revenues 284 273 168 73 94 228
Charges for services 82 80 77 25 38 33
Other 81 76 61 49 32 22
Total revenue $ 990 $ 956 $ 881 $ 757 $ 826 $ 948
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 2010 was $948, an increase of about 14.8 percent
from the prior year. This was primarily due to an increase in intergovernmental revenue in the current
year. The increase in intergovernmental revenue, which increased $134 per capita, was mainly due to the
City receiving grants for the Bass Lake Road Streetscape Project and the Neighborhood Stabilization
Program.
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GOVERNMENTAL FUNDS EXPENDITURES
Similar to our discussion of revenues, the expenditures of governmental funds will vary from state -wide
averages and from year -to -year, based on the City's circumstances. Expenditures are classified into three
types as follows:
• Current — These are typically the general operating type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
• Capital Outlay and Construction — These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year -to -year. Many of these expenditures are
project- oriented, and are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
• Debt Service — Although the expenditures for 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
Year December 31, 2009 2008 2009 2010
Population 2,500- 1000 10,000- 2000 20 100 30 29 30
Current
General government $ 120 $ 107 $ 79 $ 118 $ 129 $ 128
Public safety 217 233 241 265 284 283
Street maintenance 112 106 82 71 72 72
Parks and recreation 61 81 86 79 83 81
All other 81 81 96 239 69 80
$ 591 $ 608 $ 584 $ 772 $ 637 $ 644
Capital outlay
and construction $ 336 $ 325 $ 267 $ 149 $ 95 $ 284
Debt service
Principal $ 196 $ 135 $ 126 $ 95 $ 149 $ 155
Interest and fiscal 73 51 39 37 40 35
$ 269 $ 186 $ 165 $ 132 $ 189 $ 190
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 due to
above average general government and public safety costs. The City's per capita current expenditures
increased about $7 per capita in 2010 as a result of the City expending funds in the Community
Development Block Grant (CDBG) Fund relating to the Neighborhood Stabilization Program. This was a
new grant the City received in 2010 and will continue through 2011. Capital outlay costs per capita
increased $189 as a result of the Bass Lake Road Streetscape Project that was completed in the current
year.
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FINANCIAL TRENDS AND CONDITIONS OF SELECTED FUNDS
GENERAL FUND
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 1 000 1 000
$16
$14
$12
$10
$ 8,000,000
$ 6,000,000
$4,000,000
$ 2,000,000
2005 2006 2007 2008 2009 2010
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,
2010 was $9,440,244, which increased $422,404 from 2009. Total fund balance at December 31, 2010
was $8,830,347, up $300,342 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, 2010,
the City's General Fund had a fund balance of 53.1 percent of the City's annual General Fund
expenditures, based on 2010 expenditure levels.
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The following graph reflects the City's General Fund reliance on its revenue sources for 2010:
General Fund Revenue
Taxes
Licenses /Permits
Intergovernmental
Charges for Services
Other
0 0 0 0 0 0 0 0 0 0 0 0 0
O O O O O O O O O O O O O
0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 0 ®' 0 00' 0 00
1) t 4K 1) n Q5 n
S S S
❑ Budget ❑ Actual
Total General Fund revenues for 2010 were $16,085,070, which was $95,492 (0.6 percent) over the final
budget. Licenses and permits were over budget by $353,008 due to a building permit for the
redevelopment of a parcel of land previously owned by the City. Intergovernmental revenues were under
budget by $201,755 due to the CDBG money, which was budgeted for under federal grants, but the funds
were recorded into the CDBG Fund and then transferred to the General Fund.
The following graph presents the City's General Fund revenue sources for the last five 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
$1200
$10
$ 9,000,000
$7,500,000
$ 6,000,000
$4,500,000
$3,000,000
$1,500,000 - L
$—
T axes Intergovernmental Other
1:12006 ■ 2007 ❑ 2008 ■ 2009 ■ 2010
Overall, General Fund revenues decreased $103,103 (0.7 percent) from the previous year. Tax revenue
increased about $255,000 due to the increased tax levy in the current year. The decrease in
intergovernmental revenue of about $606,000 is related to the decrease in LGA the City received. Other
revenue increased about $248,000 mostly in the area of licenses and permits. As described above,
licenses and permits increased due to a building permit for the redevelopment of a parcel of land
previously owned by the City.
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The following illustrations provide you with the components of the City's General Fund spending for
2010 and for the past five years:
General Fund Expenditures
General Government
Public Safety
Public Works
Parks and Recreation
Other
OH O ® �O OD O OD O OD O OD O OH O OD O OH O
0001 00 01 00 01 00 01 0001 0 001 O ® 0 001 O
❑ Budget ❑ Actual
Total General Fund expenditures for 2010 were $16,642,116, which was $429,206 (2.5 percent) less than
budget. The largest areas that were under budgeted amounts were for personal costs within the protective
inspection and police protection departments totaling $195,295 and $182,283, respectively. These
variances were mostly the result of multiple vacant positions during the year. The non - departmental
services and charges were also under budgeted amounts by $81,851.
General Fund Expenditures by Function
Year Ended December 31,
$ 9,000,000
$ 8,000,000
$7,000,000
$ 6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000 L-L= -0
$—
General Public Safety Public Works Parks and Other
Government Recreation
112006 ■ 2007 112008 ■ 2009 ■ 2010
General Fund expenditures increased about $365,000, or 2.2 percent, from the prior year, mainly due to
the roughly $209,000 increase in the general government function and the approximate $110,000 increase
in the public safety function. The increase in general government expenditures are the result of chiller
repairs at City Hall, election expenditures in 2010, and the change in the coding of utility employees in
2010. The increase in public safety expenditures is due to increased fuel costs, increased vehicle
replacement and repair charges, and upgrades in equipment and supplies in the current year.
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UTILITY FUNDS
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,
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$—
$ (500,000)
2005 2006 2007 2008 2009 2010
D Operating Revenue
Operating Expenses
Project Costs
Operating Income (Loss), Excluding Project Costs
The Water Fund ended 2010 with net assets of $10,764,450, an increase of $127,585 from the prior year.
Of this, $9,327,527 represents the investment in utility distribution system capital assets, leaving
$1,436,923 of unrestricted net assets.
Water Fund operating revenue was $1,929,058 for 2010, a decrease of $45,042 over the prior year.
Operating expenses of $1,689,785 were $1,748,761 less than last year. The significant decrease in
operating expenses is a result of the City having significantly less project costs, as the City spent
approximately $1.6 million for replacing all water meters and installing an automated utility billing
system in 2009.
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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)
2005 2006 2007 2008 2009 2010
0 Operating Revenue
Operating Expenses
Project Costs
Operating Income (Loss), Excluding Project Costs
The Sanitary Sewer Fund ended 2010 with net assets of $12,414,974, an increase of $35,554 from the
prior year. Of this, $9,980,366 represents the investment in the sanitary sewer capital assets, leaving
$2,434,608 of unrestricted net assets.
Sanitary Sewer Fund operating revenues for 2010 were $3,320,205, which was a slight increase of $4,608
from the prior year.
Operating expenses for 2010 were $3,244,247, a decrease of $481,456 from the prior year. This decrease
is mostly related to the City having significant project costs in the prior year for replacing all meters and
installing an automated utility billing system, which totaled about $600,000.
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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
$-
2005 2006 2007 2008 2009 2010
D Operating Revenue
Operating Expenses
Operating Income (Loss)
The Storm Drainage Fund ended 2010 with net assets of $18,984,089, an increase of $643,497 from the
prior year. Of this, $15,978,516 represents the investment in capital assets, leaving $3,005,573 of
unrestricted net assets.
Storm Drainage Fund operating revenues for 2010 were $1,575,529, which was a slight decrease of
$2,150 from the prior year.
Operating expenses for 2010 were $1,344,929, which was $66,829 higher than the prior year. Much of
this increase relates to an increase in personal service expenses of $60,346 in the current year. This is a
result of the City moving a second staff into this department mid -year and the extra snowplowing that was
needed in 2010 compared to 2009.
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OTHER ENTERPRISE FUNDS
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
$-
2005 2006 2007 2008 2009 2010
OSales
Cost of Sales
Operating Expenses
Operating Income (Loss)
The Liquor Fund ended 2010 with net assets of $2,029,277, an increase of $54,125 from the prior year.
Of the net asset balance, $34,819 represents the investment in liquor capital assets, leaving $1,994,458 of
unrestricted net assets.
Liquor sales for 2010 were $5,543,026, about $67,082 (1.2 percent) less than the prior year. Other than
the slight decrease in 2010, sales have steadily increased over the last several years, increasing by about
20.3 percent since 2005. The Liquor Fund generated operating income of $276,547 in 2010, or about
5.0 percent of gross sales, which is comparable to the 4.9 percent of gross sales in fiscal 2009.
The Liquor Fund gross profit margin was 27.66 in fiscal 2010 compared to a similar amount of 27.13 in
fiscal 2009.
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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
2005 2006 2007 2008 2009 2010
D Sales and User Fees
Operating Expenses
Cost of Sales
Operating Income (Loss)
The Earle Brown Heritage Center Fund ended 2010 with net assets of $6,308,914, a decrease of $343,867
from the prior year. Of the net asset balance, $5,460,181 represents investments in Earle Brown Heritage
Center capital assets, leaving $848,733 of unrestricted net assets.
Earle Brown Heritage Center Fund sales and user fees for 2010 were $3,834,391, about $292,314
(8.2 percent) more than last year. The increase is directly related to the increase in the number of events
compared to prior year. Operating expenses for 2010 were $2,335,590, a decrease of $16,550 from the
prior year.
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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 --
2005 2006 2007 2008 2009 2010
D Operating Revenue
Operating Expenses
Operating Income (Loss)
The Golf Course Fund ended 2010 with net assets of $709,899, a decrease of $95,413 from the prior year.
Of this, $1,604,488 represents the investment in golf course land and capital assets, leaving a deficit of
($894,589) in unrestricted net assets.
Golf Course Fund operating revenues for 2010 were $219,159, about $30,151 less than last year.
Operating expenses for 2010 were $314,578, down $4,269 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
$892,137 at December 31, 2010.
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.
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GOVERNMENT -WIDE FINANCIAL STATEMENTS
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:
Invested in Capital Assets, Net of Related Debt — The portion of net assets reflecting equity in
capital assets (i.e. capital assets minus related debt).
Restricted Net Assets — The portion of net assets equal to resources whose use is legally
restricted minus any non - capital- related liabilities payable from those same resources.
Unrestricted Net Assets — The residual balance of net assets after the elimination of invested in
capital assets, net of related debt and restricted net assets.
The following table presents the components of the City's net assets as of December 31, 2010 and 2009,
for governmental activities and business -type activities:
As of December 31, Increase
2010 2009 (Decrease)
Net assets
Governmental activities
Invested in capital assets,
net of related debt $ 40,978,165 $ 33,55004 $ 7,427,501
Restricted 22,067,726 29,027,991 (6,960,265)
Unrestricted 6,985,972 4,082,990 2,902,982
Total governmental activities 70,031,863 66,661,645 3,370,218
Business -type activities
Invested in capital assets,
net of related debt 4200,624 42,297,110 503,514
Unrestricted 8,673,168 8,835,644 (162,476)
Total business -type activities 51,473,792 51,132,754 341,038
Total net assets $ 121,505,655 $ 117,794,399 $ 3,711,256
The governmental activities invested in capital assets, net of related debt increased approximately
$7.4 million during the year. This increase was primarily related to the Bass Lake Road Streetscape
Project and various street capital projects that occurred in 2010. The governmental activities restricted
net asset balance decreased about $7.0 million partially due to the City completing a review of the assets
held for resale and marking them down to net realizable value in the current year.
The business -type activities net assets increased approximately $341,000 during the year mostly in the
Water Utility and Storm Drainage Utility Funds. This was a result of the City having less project costs in
the current year, as the City replaced all water meters and installed an automated utility billing system in
the prior year.
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Statement of Activities
The Statement of Activities tracks the City's yearly revenues and expenses, as well as any other
transactions that increase or reduce total net assets. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund -based financial statements. This statement includes the
cost of supplies used, depreciation of long -lived capital assets, and other accrual -based expenses.
The following table presents the change in net assets of the City for the years ended December 31, 2010
and 2009:
2010 2009
Program
Expenses Revenues Net Change Net Change
Net (expense) revenue
Governmental activities
General government $ 3,553,737 $ 1,151,839 $ (2,401,898) $ (2,517,230)
Public safety 9,125,547 2,434,618 (6,690,929) (6,917,905)
Public works 2,747,641 6,741,236 3,993,595 (1,005,729)
Community service 82,645 442 (82,203) (71,519)
Parks and recreation 2,732,401 768,556 (1,963,845) (2,005,800)
Economic development 6,504,034 902,306 (5,601,728) (2,151,471)
Interest on long -term debt 974,950 — (974,950) (1,143,546)
Business -type activities
Municipal liquor 1,262,076 1,538,403 276,327 280,229
Golf course 317,539 219,165 (98,374) (73,938)
Earle Brown Heritage Center 2,345,920 1,879,902 (466,018) (637,227)
Recycling and refuse 278,381 283,057 4,676 (8,742)
Street light utility 213,752 258,535 44,783 33,734
Water utility 1,792,628 1,959,684 167,056 (1,429,494)
Sanitary sewer utility 3,282,472 3,321,373 38,901 (421,263)
Storm drainage utility 1,348,974 1,575,679 226,705 295,374
Total net (expense) revenue $ 36,562,697 $ 23,034,795 (13,527,902) (17,774,527)
General revenues
Property taxes 12,949,069 12,899,250
Tax increments 3,127,373 3,616,157
Lodging taxes 696,746 591,291
Grants and contributions not
restricted to specific programs 411,378 1,019,990
Unrestricted investment earnings 54,592 397,214
Gain on disposal of capital asset — 40,632
Total general revenues and transfers 17,239,158 18,564,534
Change in net assets $ 3,711,256 $ 790,007
One of the goals of this statement is to provide a side -by -side comparison to illustrate the difference in the
way the City's governmental and business -type operations are financed. The table clearly illustrates the
dependence of the City's governmental operations on general revenues, such as property taxes and
unrestricted grants. It also shows that, for the most part, the City's business -type activities are generating
sufficient program revenues (service charges and program - specific grants) to cover expenses. This is
critical given the current downward pressures on the general revenue sources.
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ACCOUNTING AND AUDITING UPDATES
GASB STATEMENT NO. 54 - FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE
DEFINITIONS
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
(nonspendable, restricted, committed, assigned, and unassigned) 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, special revenue, capital
projects, debt service, and permanent fund types are clarified by the provisions in this statement; which
could necessitate changes in fund structure, particularly for existing special revenue funds. Elimination of
the reserved component of fund balance in favor of a restricted classification will 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.
GASB STATEMENT NO. 60 - ACCOUNTING AND FINANCIAL REPORTING FOR SERVICE CONCESSION
ARRANGEMENTS
This statement provides accounting and financial reporting guidance for governments that participate as
either a transferor or an operator in a service concession arrangement (SCA). SCAs are arrangements
whereby a government transfers the rights to operate one of its capital assets to a third party operator
(either a private party or another government) for consideration, with the operator then being
compensated from the fees or charges collected in connection with the operation of the asset. To qualify
as an SCA, an arrangement must meet all of the following criteria: 1) the transferor must convey to the
operator both the right and the obligation to use one of its capital assets to provide services to the public;
2) the operator must provide significant consideration to the transferor; 3) the operator must be
compensated from the fees or charges it collects from third parties; 4) the transferor must have the ability
to either determine, modify, or approve what services are to be provided to whom at what price; and
5) the transferor must retain a significant residual interest in the service utility of the asset. This statement
provides guidance to governments that are party to an SCA for reporting the assets, obligations, and flow
of revenues that result from the arrangement; along with the required financial statement disclosures. The
requirements of this statement must be implemented for fiscal year ending December 31, 2012, with
earlier implementation encouraged.
GASB STATEMENT NO. 61 - THE FINANCIAL REPORTING ENTITY: OMNIBUS
This statement amends the current guidance in GASB Statement No. 14, "The Financial Reporting
Entity," for identifying and presenting component units. This statement changes the fiscal dependency
criterion for determining component units. Potential component units that meet the fiscal dependency
criterion for inclusion in the financial reporting entity under existing guidance will only be included if
there is also "financial interdependency" (an ongoing relationship of potential financial benefit or burden)
with the primary government. This statement also clarifies the types of relationships that are considered
to meet the "misleading to exclude" criterion for inclusion as a component unit; changes the criteria for
blending component units; gives direction for the determination and disclosure of major component units;
and adds a requirement to report an explicit, measurable equity interest in a discretely presented
component unit in a statement of position prepared using the economic resources measurement focus.
The requirements of this statement must be implemented for fiscal year ending June 30, 2013, with earlier
implementation encouraged.
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