Loading...
HomeMy WebLinkAbout2009 Management Report - MMKR Management Report for City of Brooklyn Center, Minnesota December 31, 2009 PRINCIPALS 'Ken nech W. Mal U"A Thoinas M. N4u n ta CPA M KR Thomas A. Karnowski, CPA Paul A. Radosevich, CPA CERTIFIED PUBLIC W. illiarn J. Lauer, CPA A C C 0 U N T A N T S J ames H, Eichtcn, CPA Aaron J. Nielsen, C11A Victoria L. Hokika, CPA To the Cit Council 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, 2009. 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 Anal • 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. Ma 27, 2010 Mallo Monta Karriowski, Radosevich & Co., P.A. 5353 Wa Boulevard -P Suire 410 4, Minncapolis, MN 55416 e TV[cphonc: 952-545-0424 @ Tcicfax. 952-54.5-0569 @ www.mmkr.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. 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, 2009. 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, 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 to you the following information related to our audit. AUDIT OPINION AND FINDINGS Based on our audit of the City's financial statements for the year ended December 31, 2009: • We have issued an unqualified opinion on the City's annual financial statements. • We noted two matters involving the City's internal control over financial reporting that we considered to be significant deficiencies, one of which was considered to be a material weakness. These include the following findings: — Preparation of an adjusting journal entry, and — Lack of management approval of payroll transactions. • The results of our testing disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. • We have reported no findings based on our testing of the City's compliance with Minnesota laws and regulations. FOLLOW -UP ON PRIOR YEAR FINDINGS As a part of our audit of the City's financial statements for the year ended December 31, 2009, 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: We reported that the City did not have proper segregation of duties over the processing of payroll transactions. During the 2009 fiscal year, the City implemented procedures improving the controls over payroll processing. As a result of these improvements, we have eliminated this Ending. As part of our 2008 audit, we reported that the City did not have adequate documentation of the components of internal controls. During the 2009 year, the City established formal written internal control accounting procedures and as a result has eliminated this finding. We reported that the City had not established procedures regarding the accuracy of meter readings or the periodic verification of residential meter readings. During the 2009 year, the City has replaced all water meters and installed an automated utility billing system and as a result has eliminated this finding. -1- As part of our calendar 2008 audit, we noted the City had not adequately designed the controls over the processing of capital assets and land held for resale resulting in a prior period adjustment. The City has improved the controls over capital assets and land held for resale in calendar 2009. As a result of these improvements we have eliminated this finding. We noted that the City did not have adequate documentation of the eligibility of retirees for other post- employment benefits (OPEB) and certain eligibility requirements of city employees for retiree benefits were difficult to determine. During the 2009 year, the City has established procedures to obtain this documentation prior to retirees receiving OPEB. We reported that the City had not paid each vendor obligation according to the terms of each contract within 35 days after the receipt of the goods or services or the invoice for the goods or services, as required by Minnesota Statutes. The City reviewed their claims and disbursement payment procedures in place in the current year. No issues were noted in this area during our 2009 audit. 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. ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS Accounting estimates are an integral part of the 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 OPEB Liabilities — Actuarial estimates of the net OPEB obligation is based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. • Land Held for Resale — Management's estimates of this asset are based on net realizable value (lower of cost or estimated sales price). Management expects any differences between estimates and actual amounts of these estimates to be insignificant. We 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. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosure affecting the financial statements was: • Net OPEB Disclosures -2- DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. 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 $191,337. Management has determined that the effects of this item are immaterial, both individually and in the aggregate, to each opinion unit's financial statements taken as a whole. 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 27, 2010. 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. -3- FUNDING CITIES IN MINNESOTA LEGISLATION The following is a summary of significant legislative activity passed in calendar 2009 affecting the finances of Minnesota cities: Unallotment — The 2009 legislative session ended without an agreement on how to erase the state budget deficit. The Legislature approved and sent a final package of budget - balancing tax items to the Governor, but the Governor vetoed the bill and balanced the budget on his own 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). The unallotments included $193 million in reductions in calendar 2009 and 2010 to LGA and MVHC to cities, calculated at 3.31 percent and 7.64 percent, respectively, of the total calendar 2009 aggregated levy and LGA of the city. Cuts are first taken from LGA and then from MVHC, as necessary. A city's total reduction could not exceed $22 and $55 per capita, respectively. Cities with populations below 1,000 and below the state -wide average tax base per capita were exempted from these cuts. In May 2010, the Minnesota Supreme Court ruled on a lawsuit brought by a program that had its funding cut through unallotment. The court ruled that the Governor's "use of unallotment power to address the unresolved deficit exceeded the authority granted to the executive branch by statute." While the court ruled only on the cuts to this specific program, the decision called into question all of the Governor's reductions, which were subsequently revisited during the 2010 legislative session. Levy Limitations — The 2008 Legislature passed a law that limits general operating property tax levy increases for cities with populations over 2,500 to 3.9 percent annually for the next three calendar years. The 2009 legislative session ended with levy limits intact. Levy limits will remain in place for at least the 2010 budget year, with a couple of minor modifications that were contained in laws passed in 2009. For the calendar 2010 tax year, cities will be able to declare "special levies" for the calendar 2008 and 2009 unallotment losses described earlier. The calendar 2010 unallotment losses can be declared for the 2011 tax year. Emergency Certificates of Indebtedness — The law authorizes a city to issue emergency debt certificates if the city's current year revenues are reasonably expected to be reduced below the amount provided in the city's budget approved when the property tax levy of the city was certified. This law only allows for the issuance of this debt if the revenues of the city will be insufficient to meet the expenses incurred or to be incurred during the current fiscal year. For example, emergency debt certificates could be issued as a result of mid -year reductions in state aid payments for LGA or MVHC, or when a city is experiencing a high level of property tax delinquencies. This law also requires the city to levy property taxes for the payment of principal and interest on the certificates issued. FEDERAL RECOVERY ACT The American Recovery and Reinvestment Act of 2009 is expected to provide approximately $300 billion in federal funds to state and local governments, and to institutions of higher education. These funds are intended to supplement existing federal programs, create new programs, or provide more broad fiscal relief. Many cities are hoping to receive some of these temporary funds for programs and projects. The American Recovery and Reinvestment Act of 2009 mandates that there be an unprecedented amount of oversight and transparency around the spending of these funds, including specific audit and internal control requirements. -4- The additional internal control requirements include the need for controls over the acceptance of recovery funds, appropriate controls over the segregation of these funds from other sources of revenue, compliance with the additional laws and regulations specific to each grant award, and additional financial reporting requirements back to the appropriate federal agency. These additional controls also include considerations into whether control procedures are in place over the federal grant expenditures to prevent unallowable expenditures, consideration into whether additional controls and systems will be needed to ensure funds are able to be separately tracked and identified, and consideration into if controls are sufficient for any funds that are passed along to subrecipients. 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 average increases of 7.0 percent for taxes payable in 2008 and 1.5 percent for those payable in 2009, reflecting the slowdown in growth of market values. In comparison, the City's market value increased by 2.7 percent in 2008 and decreased 4.7 percent in 2009. It is important to remember that the 2009 market value is based on estimated values as of January 1, 2008, 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 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5- 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. Your city's tax capacity increased 6.1 percent for 2008 and decreased 2.7 percent for 2009. 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 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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 capacity All Cities Seven - County City of State -Wide Metro Area Brooklyn Center 2008 2009 2008 2009 2008 2009 Average tax rate City 36.3 36.9 33.6 33.7 43.9 47.5 County 38.0 39.3 34.9 34.7 38.6 40.4 School 21.1 22.0 21.3 22.1 26.6 29.0 Special taxing 5.6 5.5 7.0 5.9 8.8 8.8 Total 101.0 103.7 96.8 96.4 117.9 125.7 Both the City's portion and the total tax capacity rates for Brooklyn Center residents are significantly higher than the state -wide and metro area averages the last two years. These rates are higher than average due to a combination of factors, including lower than average property values, makeup of residential properties, and the use of tax increments within the City. -6- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City's governmental funds. Governmental funds include the General Fund and the special revenue, debt service, and capital project funds. We have also included the most recent comparative state -wide averages available from the State Auditor. The reader needs to consider the effect of inflation and other known changes or differences when comparing this data. Also, certain data on these tables may be classified differently than how they appear on the City's financial statements in order to be more comparable to the state -wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management's Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Keep in mind that your city's per capita revenue and expenditures maybe higher or lower than average due to your city's level of commercial development and activity for a city in your population class. 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 Year December 31, 2008 2007 2008 2009 Population 2,500 - 1000 10 2000 20 100 27,901 27,907 29,500 Property taxes $ 355 $ 351 $ 376 $ 433 $ 444 $ 437 Tax increments 47 56 61 98 104 122 Franchise fees and other taxes 22 34 37 49 45 42 Special assessments 81 53 61 49 46 46 Licenses and permits 27 25 33 24 23 21 Intergovernmental revenues 247 242 147 114 79 95 Charges for services 82 78 79 25 27 38 Other 97 95 89 79 53 32 Total revenue $ 958 $ 934 $ 883 $ 871 $ 821 $ 833 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 2009 was $833, an increase of about 1.5 percent from the prior year. This was primarily the result of the increase in intergovernmental revenue and charges for services offset by the decrease in other revenue. The increase in intergovernmental revenue, which increased $16 per capita, was mainly due to the increase in LGA received. Charges for services increased about $11 per capita due to additional activities performed by public safety in the area of code enforcement and the registration of vacant properties within the City. With the decline in the market, investment earnings decreased compared to the prior year, causing other revenue to decrease $21 per capita. -7- Governmental Funds Expenditures The expenditures of governmental funds will also vary from state -wide averages and from year -to -year, based on the City's circumstances. Expenditures are classified into three types as follows: Current — These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources such as taxes and intergovernmental revenues. Capital Outlay and Construction — These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year -to -year. Many of these expenditures are project-oriented, which are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service — Although the expenditures for the debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City's per capita governmental funds expenditures for the past three years, together with state -wide averages, are presented in the following table: Governmental Funds Expenditures per Capita With State -Wide Averages by Population Class State -Wide City of Brooklyn Center Year December 31, 2008 2007 2008 2009 Population 2 1000 10 20 20 100 27 27 29 Current General government $ 130 $ 115 $ 86 $ 106 $ 128 $ 131 Public safety 217 234 237 271 288 287 Street maintenance 114 113 88 83 77 73 Parks and recreation 65 86 86 83 86 83 All other 81 94 100 192 259 70 $ 607 $ 642 $ 597 $ 735 $ 838 $ 644 Capital outlay and construction $ 379 $ 338 $ 327 $ 162 $ 162 $ 96 Debt service Principal $ 171 $ 135 $ 112 $ 100 $ 103 $ 151 Interest and fiscal 71 48 41 41 41 41 $ 242 $ 183 $ 153 $ 141 $ 144 $ 192 The City's governmental funds current per capita expenditures are higher than state -wide averages for cities in the same population class. The City's current operating costs are higher than average mostly related to higher than average public safety costs. The City's per capita current expenditures decreased significantly in 2009 as a result of the City expending significant funds in Tax Increment District #3 for acquisition and development of properties within the City of about $187 per capita in the prior year. Capital outlay costs per capita decreased about $66 as a result of a decrease in construction projects in the current year. Debt service principal increased in fiscal 2009 as the City was using tax increment revenues to pay principal payments on tax increment bonds outstanding. -8- FINANCIAL TRENDS AND ANALYSIS 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 NMI $- 2004 2005 2006 2007 2008 2009 Fund Balance Cash Balance (Net of Interfund Borrowing) The City's General Fund cash and investments balance (net of interfund borrowing) at December 31, 2009 was $9,017,840, which increased $731,459 from 2008. Total fund balance at December 31, 2009 was $8,530,005, up $786,567 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, 2009, the City's General Fund had a fund balance of 52.4 percent of the City's annual General Fund expenditures, based on 2009 expenditure levels. -9- The following graph reflects the City's General Fund reliance on its revenue sources for 2009: 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 0 0 0 0 ^ 0 0 0 00' 0 Q 0 0 ❑ Budget ❑ Actual Total General Fund revenues for 2009 were $16,188,173, an increase of $1,161,029 or 7.7 percent from the previous year, and $261,152 (1.6 percent) over the final budget. Charges for services were over budget $389,578 due to additional activities performed by public safety in the area of code enforcement and the registration of vacant properties within the City which were more than anticipated in the budget. The following graph presents the City's General Fund revenue sources for the last six years. The graph reflects a common trend experienced by Minnesota cities over the past few years with decreased or minimal increases in state aids. This trend forces a higher reliance on taxes and other sources to fund the natural increases in costs over time. General Fund Revenue by Source Year Ended December 31, $13,50000 $12 $M500 $9,000,000 $7,500,000 $6,000,000 $4,50000 $3,000,000 $1,5 00,000 $- 2004 2005 2006 2007 2008 2009 ❑ Taxes ■ Intergovernmental ❑ Other The above graph reflects an increase in revenue of $1,161,029 from the prior year. Tax revenue increased about $404,000 due to the increased tax levy in the current year. The increase in intergovernmental revenue of about $432,000 is related to the increase in LGA the City received. Other revenue increased about $326,000 mostly in the area of charges for services. As described above, charges for services increased due to additional activities performed by public safety in the area of code enforcement and the registration of vacant properties within the City. -10- The following illustrations provide you with the components of the City's General Fund spending for 2009 and for the past six years: General Fund Expenditures General Government Public Safety Public Works Parks and Recreation Other Q� O" O Z 0 Q0 0® ® O OH O OH O o0 0 OH O o �0 0 �0 OH O OH O OH O ❑ Budget ❑ Actual Total General Fund expenditures for 2009 were $16,276,924, an increase of $253,029 (1.6 percent) from the prior year, and $593,811 (3.5 percent) less than budget. The largest areas that were under budgeted amounts were for personal costs within the protective inspection department totaling $218,128 and the non - departmental services and charges totaling $288,210. 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 1 1 1 F-I I F-I $- 2004 2005 2006 2007 2008 2009 ■ General Government ❑ Public Safety ❑ Public Works General Fund expenditures increased about $253,000 from the prior year mainly due to the $370,000 increase in the public safety department. The increase was a result of personnel costs for police protection. The increase in public safety costs was offset by the decrease in the general government. General government expenditures decreased about $160,000 due to decreases in legal fees and building repairs. -11- 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) 2004 2005 2006 2007 2008 2009 D Operating Revenue Operating Expenses Project Costs Operating Income (Loss) Excluding Project Costs The Water Fund ended 2009 with net assets of $10,636,865, a decrease of $1,109,707 from the prior year. Of this, $8,902,333 represents the investment in utility distribution system capital assets, leaving $1,734,532 of unrestricted net assets. Water Fund operating revenue was $1,974,100 for 2009, an increase of $6,566 over the prior year. Operating expenses were $1,662,518 more than last year. The significant increase in operating expenses is a result of the City having significant project costs in 2009 for replacing all water meters and installing an automated utility billing system which totaled about $1.6 million. -12- Sanitary Sewer Fund The following graph presents six years of operating results for the Sanitary Sewer Fund: Sanitary Sewer Fund Year Ended December 31, $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $— $ (500,000) 2004 2005 2006 2007 2008 2009 D Operating Revenue Operating Expenses ® Project Costs Operating Income (Loss) Excluding Project Costs The Sanitary Sewer Fund ended 2009 with net assets of $ 12,379,420, a decrease of $384,061 from the prior year. Of this, $9,474,762 represents the investment in the sanitary sewer capital assets, leaving $2,904,658 of unrestricted net assets. Sanitary Sewer Fund operating revenues for 2009 were $3,315,597, about $51,482 higher than last year. The increase in revenue is due to a combination of increased consumption and an increase in rates in 2009. Operating expenses for 2009 were $3,725,703, an increase of $718,504 from the prior year. This increase is mostly related to the City having significant project costs in 2009 for replacing all meters and installing an automated utility billing system which totaled about $600,000. -13- Storm Drainage Fund The following graph presents six years of operating results for the Storm Drainage Fund: Storm Drainage Fund Year Ended December 31, $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $ 600,000 $400,000 $200,000 $- 2004 2005 2006 2007 2008 2009 D Operating Revenue Operating Expenses Operating Income (Loss) Excluding Project Costs The Storm Drainage Fund ended 2009 with net assets of $18,340,592, an increase of $440,475 from the prior year. Of this, $15,875,928 represents the investment in capital assets, leaving $2,464,664 of unrestricted net assets. Storm Drainage Fund operating revenues for 2009 were $1,577,679, about $24,643 higher than last year. The increase is due to an increase in rates in 2009. Operating expenses for 2009 were $1,278,100, about $122,859 higher than the prior year. Much of this increase relates to the increase in depreciation expense of $94,914 in the current year. -14- 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 $- 2004 2005 2006 2007 2008 2009 OSales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Fund ended 2009 with net assets of $1,975,152, an increase of $35,948 from the prior year. Of the net asset balance, $21,848 represents the investment in liquor capital assets, leaving $1,953,304 of unrestricted net assets. Liquor sales for 2009 were $5,610,108, about $125,579 (2.3 percent) more than last year. Sales have steadily increased over the last several years, increasing by about 39 percent since 2004. The Liquor Fund generated operating income of $277,711 in 2009, or about 4.9 percent of gross sales compared to 6.7 percent of gross sales in fiscal 2008. This decline was the result in an increase in operating costs in fiscal 2009 of $123,277 or 11.0 percent. The Liquor Fund gross profit margin was 27.13 in fiscal 2009 compared to a similar amount of 27.11 in fiscal 2008. -15- Earle Brown Heritage Center Fund The following graph presents six years of operating results for the Earle Brown Heritage Center Fund: Earle Brown Heritage Center Fund Year Ended December 31, $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $(500,000) $(1 2004 2005 2006 2007 2008 2009 D Sales and User Fees Operating Expenses Cost of Sales Operating Income (Loss) The Earle Brown Heritage Center Fund ended 2009 with net assets of $6,652,781, a decrease of $801,806 from the prior year. Of the net asset balance, $5,978,881 represents investments in Earle Brown Heritage Center capital assets, leaving $673,900 of unrestricted net assets. Earle Brown Heritage Center Fund sales and user fees for 2009 were $3,542,077, about $289,895 (7.6 percent) less than last year. The decrease is directly related to the slowing economy and a decrease in the number of events compared to prior year. Operating expenses for 2009 were $2,352,140, a decrease of $43,786 from the prior year. -16- Golf Course Fund The following graph presents six years of operating results for the Golf Course Fund: Golf Course Fund Year Ended December 31, $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $— $ (50,000) $(100,000) 2004 2005 2006 2007 2008 2009 D Operating Revenue ® Operating Expenses Operating Income (Loss) The Golf Course Fund ended 2009 with net assets of $805,312, a decrease of $69,364 from the prior year. Of this, $1,632,672 represents the investment in golf course land and capital assets, leaving a deficit of ($827,360) of unrestricted net assets. Golf Course Fund operating revenues for 2009 were $249,310, about $4,514 less than last year. Operating expenses for 2009 were $318,847, up $17,707 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 $825,910 at December 31, 2009. We recommend that the City continue to monitor the financial results in this fund. We also recommend that the City continue to update the long -range financial plan for this fund, including progress toward having adequate resources for the payback of interfund borrowing. -17- 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 City's net assets as of December 31, 2009 for governmental activities and business -type activities: Governmental Business -Type Activities Activities Total Net assets Current and other assets $ 55,797,109 $ 9 $ 65,580,434 Net book value of capital assets 40 42,297,110 82,593 Current liabilities (7,119,011) (947,681) (8,066 Long -term liabilities (22 — (22,312 824) Total net assets $ 6601 $ 51 $ 117 Net assets Invested in capital assets, net of related debt $ 33 $ 42,297,110 $ 75,003 Restricted 29 — 29 Unrestricted 4 8,835,644 13,762 Total net assets $ 6601 $ 51,132,754 $ 117 The City's total net assets at December 31, 2009 were $790,007 higher than at the beginning of the year. The amount invested in capital assets, net of related debt increased by $2,009,900 in fiscal 2009. Restricted and unrestricted net assets decreased $1,219,893. At the end of the current fiscal year, the City is able to present positive balances in all three categories of net assets, both for the City as a whole, as well as for its separate governmental and business -type activities. The same situation held true for the prior fiscal year. -18- 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 year ended December 31, 2009: Expenses Program Revenue Net Difference Net (expense) revenue Governmental activities General government $ 3,653,956 $ 1,136,726 $ (2,517,230) Public safety 9,036 2 (6,917 Public works 207 102 (1,005,729) Parks 2,773 767 (2,005 Economic development 2,151,916 445 (2,151,471) Other 71 — (71,519) Interest on long -term debt 1 — (1,143,546) Business -type activities Utilities 808 7,166,684 (1,521,649) Liquor 1 1 280,229 Earle Brown Heritage Center 2,363 1,725 (637,227) Recycling and refuse 276 267,316 (8 Golf course 323,340 249 (73,938) $ 34 $ 16,644 (17,774,527) General revenues Property and tax increments 16 Lodging taxes 591 Unrestricted grants and contributions 1,019,990 Investment earnings 397 Other revenues 40,632 18,564,534 Increase in net assets $ 790 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 City's governmental operations tend to rely more heavily on general revenues, such as property taxes and unrestricted grants. In contrast, the City's business -type activities tend to rely more heavily on program revenues like charges for services (sales) and program specific grants to cover expenses. This is critical given the current external downward pressures on general revenue sources such as taxes and state aids. -19- ACCOUNTING AND AUDITING UPDATES GASB STATEMENT NO. 51 - ACCOUNTING AND FINANCIAL REPORTING FOR INTANGIBLE ASSETS Governments possess many different types of assets that may be considered intangible assets, including easements, water rights, timber rights, patents, trademarks, and computer software. This statement requires that all intangible assets not specifically excluded by its scope provisions be classified as capital assets. The requirements in this statement improve financial reporting by reducing inconsistencies that have developed in accounting and financial reporting for intangible assets. These inconsistencies will be reduced through the clarification that intangible assets subject to the provisions of this statement should be classified as capital assets, and through the establishment of new authoritative guidance that addresses issues specific to these intangible assets given their nature. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. GASB STATEMENT NO. 53 - ACCOUNTING AND FINANCIAL REPORTING FOR DERIVATIVE INSTRUMENTS The guidance in this statement improves financial reporting by requiring governments to measure derivative instruments at fair value in their economic resources measurement focus financial statements. These improvements should allow users of those financial statements to more fully understand a government's resources available to provide services. The disclosures provide a summary of the government's derivative instrument activity and the information necessary to assess the government's objectives for derivative instruments, their significant terms, and the risks associated with the derivative instruments. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. 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 Fund, special revenue, capital projects, debt service, and permanent fund types are clarified by the provisions in this statement. 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. -20-