HomeMy WebLinkAbout2011 Management Report - MMKR Management Report
for
City of Brooklyn Center, Minnesota
December 31, 2011
PRINCIPALS
Thomas M_Montague,CPA
MMKR Thomas A. Karnowski,CPA
Paul A.Radosevich,CPA
William J.Lauer,CPA
C E R T IF I E C? PUBLIC James H.Eichren,CPA
A C C O U N I' A N T S Aaron J.Nielsen,CPA
Victoria L. Holinka,CPA
To the City Council and Management
City of Brooklyn Center,Minnesota
We have prepared this management report in conjunction with our audit of the City of Brooklyn Center's
(the City) financial statements for the year ended December 31, 2011. The purpose of this report is to
provide comments resulting from our audit process and to communicate information relevant to city
finances in Minnesota. We have organized this report into the following sections:
• Audit Summary
• Funding Cities in Minnesota
• Governmental Funds Overview
• Financial Trends and Conditions of Selected Funds
• Accounting and Auditing Updates
We would be pleased to further discuss any of the information contained in this report or any other
concerns that you would like us to address. We would also like to express our thanks for the courtesy and
assistance extended to us during the course of our audit.
This report is intended solely for the information and use of those charged with governance of the City,
management, and those who have responsibility for oversight of the financial reporting process. It is not
intended to be,and should not be,used by anyone other than these specified parties.
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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,GOVERNMENTAIIDITINGSTANDARDS,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, 2011. 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, 2011:
• We have issued an unqualified opinion on the City's basic financial statements.
• We reported no deficiencies in 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 (SEFA) is fairly stated, in all
material respects, in relation to the basic financial statements.
• We noted two deficiencies involving the internal control over compliance and its operation. Both
of these deficiencies are considered to be significant deficiencies in our testing of major federal
programs and relate to the Public Safety Partnership and Community Policing Grants. The results
of our tests noted instances of noncompliance relating to cash management and reporting
requirements applicable to the Public Safety Partnership and Community Policing Grants. Our
findings are detailed in the Schedule of Findings and Questioned Costs as items 2011-1 and
2011-2.
• We reported one finding based on our testing of the City's compliance with Minnesota laws and
regulations. This relates to one invoice that was not paid on a timely basis and is further detailed
in the Schedule of Findings and Questioned Costs as item 2011-3.
-1-
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.
For the year ended December 31, 2011, the City has implemented Governmental Accounting Standards
Board (GASB) Statement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions."
This statement established new fund balance classifications that comprise a hierarchy based primarily on
the extent to which a government is bound to observe constraints imposed upon the use of the resources
reported in governmental funds. It also clarifies existing governmental fund type definitions to improve
the comparability of governmental fund financial statements.
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 $198,941. 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 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.
• 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 to develop these accounting estimates
in determining that they are reasonable in relation to the basic financial statements taken as a whole.
The financial statement disclosures are neutral, consistent, and clear.
-2-
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 1, 2012.
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.
OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
Our audit was conducted for the purpose of forming opinions on the financial statements that collectively
comprise the City's basic financial statements. Other information, including the introductory section,
combining and individual fund statements and schedules, and the statistical section accompanying the
basic financial statements; and the SEFA are presented for purposes of additional analysis and are not
required parts of the basic financial statements.
With respect to the combining and individual fund statements and schedules accompanying the financial
statements and the SEFA, we made certain inquiries of management and evaluated the form, content, and
methods of preparing the information to determine that the information complies with accounting
principles generally accepted in the United States of America,the method of preparing it has not changed
from the prior period, and the information is appropriate and complete in relation to our audit of the
financial statements. We compared and reconciled the combining and individual fund statements and
schedules and the SEFA to the underlying accounting records used to prepare the basic financial
statements or to the basic financial statements themselves.
With respect to the introductory section and statistical section accompanying the financial statements, our
procedures were limited to reading this other information, and in doing so we did not identify any
material inconsistencies with the audited financial statements.
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FUNDING CITIES IN MINNESOTA
LEGISLATION
The 2011 legislative session began with the state facing a projected budget deficit of$6.2 billion (later
revised down to $5.0 billion in the February 2011 Economic Forecast) for the 2012-2013 biennium. In
addition, the 2010 election dramatically changed the state's political landscape. A Democratic Governor
was in power for the first time since 1991, while Republicans had majority control of both the House and
the Senate for the first time since 1971. Predictably, as the session progressed, the Governor and
Legislature had difficulty agreeing on a state budget for the next biennium. Shortly after the 2011 regular
session ended, the Governor vetoed eight major state appropriation bills and the omnibus tax bill passed
by the Legislature,which left the majority of state agencies without a budget for the next fiscal year. This
resulted in a shutdown of"nonessential" state agencies that began July 1, 2011 and effectively ended with
the passing of appropriation bills in a special session on July 19th and 20th.
The large projected budget deficit facing the 2011 Legislature was typical of the financial challenges the
state has experienced in recent years. Unfavorable economic conditions have caused a steady
deterioration of the state's financial condition,which has resulted in a series of cuts and holdbacks in state
aids to local governments and other entities. As was the case in the last biennium,the Legislature utilized
several one-time revenue sources, transfers, and accounting shifts to minimize the need for tax increases
or state aid cuts to balance the state budget.
The following is a summary of significant legislative activity passed in calendar year 2011 affecting the
finances of Minnesota cities:
Local Government Aid (LGA) and Market Value Homestead Credit (MVHC) — One of the
appropriation bills passed in the 2011 special session was the omnibus tax bill, which includes the
appropriations for LGA and MVHC.
The Legislature retroactively reduced the fiscal 2011 appropriation for LGA by approximately
$102 million, leaving a total appropriation of$425.3 million for 2011 LGA. Minnesota cities will
receive 2011 LGA equal to the lesser of their final 2010 LGA (after the cuts by the Legislature and
Governor) or their 2011 certified LGA amount. The first half LGA payment for 2011 was also
delayed one week to July 27, so the reduced LGA amounts could be recomputed after the government
shutdown. The total LGA appropriation for fiscal 2012 will be $425.2 million, with cities again
receiving the lesser of their 2010 actual or 2011 certified amounts. In essence, this bill extended the
LGA cuts originally made in fiscal 2010 for the two subsequent years. For fiscal 2013 and beyond,
the LGA appropriation is set at$426.4 million,to be allocated using the LGA formula.
The omnibus tax bill also extended the 2010 MVHC reductions of approximately $48 million to
fiscal 2011, with cities to receive the same allocation. Beginning in fiscal 2012, the MVHC
reimbursement program is eliminated. Rather than receiving a property tax credit, qualifying
homeowner taxpayers will have a portion of the market value of their house excluded from their
taxable market value. This new system will provide homeowners property tax relief by shifting a
portion of their potential tax burden to other property classifications, rather than directly reducing
their taxes through a state paid tax credit reimbursement. While this new homestead exclusion is
calculated in a similar manner to the repealed MVHC, the actual tax relief to individual homeowner
taxpayers may vary significantly depending on the makeup of the taxing jurisdictions that levy on
their particular property.
The agriculture market value credit,however,will continue as a state-paid tax credit.
-4-
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. 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 2011 Legislature passed an omnibus tax bill during the regular session that would have
extended levy limits for two years (taxes payable in 2012 and 2013). However, this was among the
bills vetoed by the Governor, and the final omnibus tax bill passed in the special session did not
address levy limits.
Sales and Use Taxes—A number of changes and clarifications were made to Minnesota sales and use
tax provisions, including:
• Made water used directly for public safety purposes (fighting fires)exempt from sales tax.
• Expanded the sales tax exemption for the lease of motor vehicles used as ambulances to the
lease of vehicles used for emergency response.
• Added townships to the list of entities exempt from sales tax.
• Provided an exemption from sales tax for technology and electricity for qualifying large data
centers as a business incentive.
• Clarified the sales tax regulations for online hotel sales.
"Buy American" Provision Repealed — The "Buy American" provision, enacted in 2010, which
prohibited public employers from purchasing or requiring employees to purchase any uniforms, safety
equipment, or protective accessories not manufactured in the United States, was repealed. Cities may
continue to purchase American-made uniforms and equipment,but they are not required to do so.
Prohibition of Referendum Spending — Political subdivisions, including cities, are prohibited from
expending funds to promote a referendum to support imposing a local option sales tax. The political
subdivision may only expend funds to conduct the referendum.
Tax Exempt Period for Economic Development Property — The maximum allowable holding
period for property held by a political subdivision for economic development to be exempt from
property taxes was increased from eight years to nine years.
Concurrent Detachment of Parcels— State law for the concurrent detachment of property from one
city to another has been changed. In the past, both cities involved had to support the change for it to
be considered. Now, if the property owner and one of the involved cities petition for the detachment,
the proposed boundary adjustment qualifies for consideration.
Civil Immunity for Donated Public Safety Equipment — Immunity from civil tort claims is
extended to municipalities that donate public safety equipment to another municipality, unless the
claim is a direct result of fraud or intentional misrepresentation. The statute defines "public safety
equipment" as vehicles and equipment used in firefighter, ambulance and emergency medical
treatment services, rescue, and hazardous material response.
-5-
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 decreases of 3.0 percent and 5.7 percent for
taxes payable in 2010 and 2011, respectively, reflecting the weak housing market and economic
conditions experienced in recent years. In comparison, the City's taxable market value decreased
11.3 percent and 9.4 percent in 2011 and 2010, respectively. It is important to remember that the 2011
market value is based on estimated values as of January 1,2010.
The following graph shows the City's changes in taxable market value over the past 10 years:
Taxable Market Value
$2,500,000,000
$2,000,000,000
$1,500,000,000
$1,000,000,000
$500,000,000
$-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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 4.4 percent and 3.4 percent for taxes
payable in 2011 and 2010,respectively.
-6-
The following graph shows the City's change in tax capacities over the past 10 years:
Local Tax Capacity
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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.
Rates expressed as a percentage of net tax capacity
All Cities Seven-County City of
State-Wide Metro Area Brooklyn Center
2010 2011 2010 2011 2010 2011
Average tax rate
City 39.2 42.5 36.0 40.0 51.1 57.2
County 41.0 43.7 36.8 42.1 42.6 45.8
School 23.0 25.2 24.0 26.8 32.7 34.2
Special taxing 5.9 6.4 6.5 8.1 9.5 10.9
Total 109.1 117.8 103.3 117.0 135.9 148.1
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.
-7-
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. Also, certain data on these tables may be classified differently than
how they appear on the City's financial statements in order to be more comparable to the state-wide
information,particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report using per capita data in order to better identify
unique or unusual trends and activities of your city. We intend for this type of comparative and trend
information to complement, rather than duplicate, information in the Management's Discussion and
Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population
count,which for most years is based on estimates.
GOVERNMENTAL FUNDS REVENUE
The amounts received from the typical major sources of revenue will naturally vary between cities based
on their particular situation. This would include the City's stage of development, location, size and
density of its population, property values, services it provides, and other attributes. The following table
presents the 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 31,2010 2009 2010 2011
Population 2,500-10,000 10,000-20,000 20,000-100,000 29,810 30,104 30,104
Property taxes $ 386 $ 359 $ 407 $ 433 $ 432 $ 445
Tax increments 45 52 56 121 103 84
Franchise fees and other taxes 26 34 30 42 45 50
Special assessments 74 60 66 45 50 66
Licenses and permits 19 22 29 21 35 32
Intergovernmental revenues 291 271 149 94 228 164
Charges for services 89 83 76 38 33 37
Other 73 70 57 32 22 26
Total revenue $ 1,003 $ 951 $ 870 $ 826 $ 948 $ 904
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.
The City's per capita governmental funds revenue for 2011 was $904, a decrease of about 4.6 percent
from the prior year. This was primarily due to a decrease in intergovernmental revenue in the current
year. The decrease in intergovernmental revenue, which decreased $64 per capita, was mainly due to the
City receiving grants for the Bass Lake Road Streetscape Project in the prior year.
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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 31,2010 2009 2010 2011
Population 2,500-10,000 10,000-20,000 20,000-100,000 29,810 30,104 30,104
Current
General government $ 125 $ 102 S 85 S 129 S 128 S 115
Public safety 227 223 235 284 283 288
Street maintenance 108 107 86 72 72 79
Parks and recreation 75 93 87 83 81 80
All other 81 81 91 69 80 62
$ 616 $ 606 S 584 S 637 S 644 S 624
Capital outlay
and construction $ 299 $ 321 S 232 S 95 S 284 S 185
Debt service
Principal $ 180 $ 181 S 111 S 149 S 155 S 99
Interest and fiscal 63 53 43 40 35 30
$ 243 $ 234 S 154 S 189 S 190 S 129
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
decreased $20 per capita in 2011 as a result of the decreased housing expenditures in Tax Increment
District No. 3. Capital outlay costs per capita decreased $99 as a result of the Bass Lake Road
Streetscape Project that was completed in the prior year offset by the Palmer Lake Project in the current
year. Debt service costs per capita decreased$61 as a result of scheduled bond payments.
-9-
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,
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
2006 2007 2008 2009 2010 2011
�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,
2011 was $10,174,161, which increased $833,566 from 2010. Total fund balance at December 31, 2011
was $9,730,835,up$900,488 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 has an approved fund balance policy that states the General Fund will manage its cash flow by
having a year-end target unassigned fund balance of between 50 percent and 52 percent of next year's
General Fund budgeted expenditures. At December 31,2011,the City's General Fund had a fund balance
of 57.3 percent of the subsequent year's budgeted expenditures.
-10-
The following graph reflects the City's General Fund reliance on its revenue sources for 2011:
General Fund Revenue
Taxes
Licenses and Permits
Intergovernmental
Charges for Services
Other
o°°
1;1, sly' IL �I 4�1 .16, ��' �c�' �°' \ti' �L' ��' ANN'
■Budget ❑Actual
Total General Fund revenues for 2011 were $16,873,034,which was$470,461 (2.9 percent) over the final
budget. The majority of this variance was from licenses and permits and other revenue. Licenses and
permits were over budget by $355,557 from more than anticipated building related activities. Other
revenues were over budget by $210,968 due to one-time revenues from an insurance reimbursement and
revenue from LOGIS for a fiber optic project and utilities for their hot site at a city location, which were
not included in the adopted budget.
The following graph presents the City's General Fund revenues by source for the last five years. The
graph reflects the City's reliance on property taxes and other local sources of revenue, and shows the
decline in general state-aid revenue in recent years.
General Fund Revenue by Source
Year Ended December 31,
$13,500,000
$12,000,000
$10,500,000
$9,000,000
$7,500,000
$6,000,000
$4,500,000
$3,000,000
$1,500,000
$_
Taxes Intergovernmental Other
■2007 ■2008 E-12009 ■2010 ■2011
Overall, General Fund revenues increased $787,964 (4.9 percent) from the previous year. Tax revenue
increased about$600,000 due to the increased tax levy in the current year. Other revenue increased about
$192,000, mostly in the area of charges for services. Charges for services increased due to additional
activities performed in public safety for code enforcement and the registration of vacant properties within
the City. Other revenues also increased due to the one-time insurance reimbursement and the revenue
from LOGIS described above.
-11-
The following graphs illustrate the components of General Fund spending for 2011 compared to budget:
General Fund Expenditures
General Government
Public Safety
Public Works
Parks and Recreation
Other 71
�� 00 00 00 00 00 00 00 00 00
O O O O O O O O O
�000, ado,
� , � ^
❑Budget ❑Actual
Total General Fund expenditures for 2011 were $16,939,230,which was $427,711 (2.5 percent) less than
budget. The largest areas that were under budgeted amounts were for personal costs within the police
protection, fire protection, and protective inspection departments totaling $122,927, $123,096, and
$115,610, respectively. These variances were mostly the result of multiple vacant positions during the
year. The parks and recreation department was also under budgeted amounts by $106,736, mainly in
recreation programs($45,396) and park maintenance ($36,700).
The following graph presents the City's General Fund expenditures by function for the last five years.
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
ITT-
General Public Safety Public Works Parks and Other
Government Recreation
■2007 ■2008 132009 ■2010 ■2011
General Fund expenditures increased by $297,114, or 1.8 percent, from the prior year, mainly due to the
roughly $197,000 increase in the public safety function and the approximately $108,000 increase in other
expenditures. The increase in public safety expenditures is due to increased personal services in the
police protection and protective inspection departments. Other expenditures increased mainly due to
increased services and charges of$73,889 in the economic development convention bureau department.
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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
2006 2007 2008 2009 2010 2011
o Operating Revenue
�Operating Expenses
�Project Costs
Operating Income(Loss),Excluding Project Costs
The Water Fund ended 2011 with net assets of$10,909,455, an increase of$145,005 from the prior year.
Of this, $9,870,825 represents the investment in utility distribution system capital assets, leaving
$1,038,630 of unrestricted net assets.
Water Fund operating revenue was $1,948,067 for 2011, an increase of $19,009 over the prior year.
Operating expenses of$1,757,434 were $67,649 more than last year. The increase in operating expenses
in the current year is related to increased well maintenance and repairs throughout the City.
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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)
2006 2007 2008 2009 2010 2011
o Operating Revenue
�Operating Expenses
�Project Costs
Operating Income(Loss),Excluding Project Costs
The Sanitary Sewer Fund ended 2011 with net assets of$12,626,818, an increase of$211,844 from the
prior year. Of this, $11,040,202 represents the investment in the sanitary sewer capital assets, leaving
$1,586,616 of unrestricted net assets.
Sanitary Sewer Fund operating revenues for 2011 were $3,473,612, which was an increase of$153,407
from the prior year,primarily due to an approved rate increase.
Operating expenses for 2011 were $3,254,341, which was a slight increase of $10,094 from the prior
year.
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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,
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
2006 2007 2008 2009 2010 2011
D Operating Revenue
Operating Expenses
Operating Income(Loss)
The Storm Drainage Fund ended 2011 with net assets of$19,645,354, an increase of$661,265 from the
prior year. Of this, $16,448,163 represents the investment in capital assets, leaving $3,197,191 of
unrestricted net assets.
Storm Drainage Fund operating revenues for 2011 were $1,620,970, which was an increase of$45,441
from the prior year,primarily due to an approved rate increase.
Operating expenses for 2011 were $1,406,343, which was $61,414 higher than the prior year. Much of
this increase relates to an increase in personal service expenses of$43,194 in the current year. This is a
result of the City moving a second staff into this department mid-year in 2010, resulting in a full year of
expenses during the 2011 year.
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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
$-
2006 2007 2008 2009 2010 2011
D Sales
�Cost of Sales
�Operating Expenses
Operating Income(Loss)
The Liquor Fund ended 2011 with net assets of$2,300,164, an increase of$270,887 from the prior year.
Of the net asset balance, $23,538 represents the investment in liquor capital assets, leaving $2,276,626 of
unrestricted net assets.
Liquor sales for 2011 were $5,789,346, about $246,320 (4.4 percent) higher than the prior year. Other
than the slight decrease in 2010, sales have steadily increased over the last several years, increasing by
about 12.2 percent since 2006. The Liquor Fund generated operating income of $398,944 in 2011, or
about 6.9 percent of gross sales,which is an increase from the 5.0 percent of gross sales in fiscal 2010.
The Liquor Fund gross profit margin was 27.87 in fiscal 2011 compared to a similar amount of 27.66 in
fiscal 2010.
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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)
$(1,000,000)
2006 2007 2008 2009 2010 2011
D Sales and User Fees
�Operating Expenses
�Cost of Sales
Operating Income(Loss)
The Earle Brown Heritage Center Fund ended 2011 with net assets of $7,067,371, an increase of
$166,844 from the prior year. Of the net asset balance, $5,705,741 represents investments in Earle Brown
Heritage Center capital assets,leaving $1,361,630 of unrestricted net assets.
Earle Brown Heritage Center Fund sales and user fees for 2011 were $4,048,739, $214,348 (5.6 percent)
more than last year. The increase is directly related to the increase in the number of events compared to
the prior year. Operating expenses for 2011 were $2,593,559, an increase of $198,234 from the prior
year. The increase in operating expenses is due to repairs from the water damage at the Earle Brown
Heritage Center and increased equipment rental as a result of the increased events in the current 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)
$(100,000)
2006 2007 2008 2009 2010 2011
o Operating Revenue
Operating Expenses
Operating Income(Loss)
The Golf Course Fund ended 2011 with net assets of$617,927, a decrease of$91,972 from the prior year.
Of this, $1,576,303 represents the investment in golf course land and capital assets, leaving a deficit of
($958,376)in unrestricted net assets.
Golf Course Fund operating revenues for 2011 were $190,995, $28,164 less than last year. Operating
expenses for 2011 were $283,197, down $31,381 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
$955,915 at December 31,2011.
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 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, 2011 and 2010
for governmental activities and business-type activities:
As of December 31, Increase
2011 2010 (Decrease)
Net assets
Governmental activities
Invested in capital assets,
net of related debt $ 45,761,042 $ 40,978,165 $ 4,782,877
Restricted 20,501,976 22,067,726 (1,565,750)
Unrestricted 8,721,865 6,985,972 1,735,893
Total governmental activities 74,984,883 70,031,863 4,953,020
Business-type activities
Invested in capital assets,
net of related debt 45,051,128 42,800,624 2,250,504
Unrestricted 8,300,659 8,673,168 (372,509)
Total business-type activities 53,351,787 51,473,792 1,877,995
Total net assets $ 128,336,670 $ 121,505,655 $ 6,831,015
The governmental activities net assets increased approximately $4.9 million during the year,mainly in the
invested in capital assets, net of related debt component, which increased about $4.8 million. This
increase was primarily related to the Palmer Lake Street Project and various street and improvement
projects that occurred in 2011.
The business-type activities net assets increased approximately $1.9 million during the year, mostly in the
Municipal Liquor and Storm Drainage Utility Funds.
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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, 2011
and 2010:
2011 2010
Program Net(Expense) Net(Expense)
Expenses Revenues Revenue Revenue
Net(expense)revenue
Governmental activities
General government $ 3,216,321 $ 1,121,444 $ (2,094,877) $ (2,401,898)
Public safety 9,268,897 2,354,351 (6,914,546) (6,690,929)
Public works 2,771,602 5,322,842 2,551,240 3,993,595
Community service 100,849 — (100,849) (82,203)
Parks and recreation 2,895,769 847,917 (2,047,852) (1,963,845)
Economic development 2,542,520 743,040 (1,799,480) (5,601,728)
Interest on long-term debt 865,799 — (865,799) (974,950)
Business-type activities
Municipal liquor 1,218,399 1,620,315 401,916 276,327
Golf course 284,673 191,225 (93,448) (98,374)
Earle Brown Heritage Center 2,602,074 2,075,629 (526,445) (466,018)
Recycling and refuse 284,440 290,019 5,579 4,676
Street light utility 232,716 297,340 64,624 44,783
Water utility 1,825,558 1,990,664 165,106 167,056
Sanitary sewer utility 3,277,874 3,494,923 217,049 38,901
Storm drainage utility 1,407,712 1,631,389 223,677 226,705
Total net(expense)revenue $ 32,795,203 $ 21,981,098 (10,814,105) (13,527,902)
General revenues
Property taxes 13,336,056 12,949,069
Tax increments 2,525,057 3,127,373
Lodging taxes 852,302 696,746
Grants and contributions not
restricted to specific programs 549,649 411,378
Unrestricted investment earnings 270,526 54,592
Gain on disposal of capital asset 111,530 —
Total general revenues and transfers 17,645,120 17,239,158
Change in net assets $ 6,831,015 $ 3,711,256
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.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). SCAB 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 periods beginning after December 15, 2011, 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 periods beginning after June 15, 2012, with
earlier implementation encouraged.
GASB STATEMENT NO.63-FINANCIAL REPORTING OF DEFERRED OUTFLOWS OF RESOURCES,
DEFERRED INFLOWS OF RESOURCES,AND NET POSITION
This statement provides financial reporting guidance for deferred outflows of resources and deferred
inflows of resources; which are defined as the consumption or acquisition of net assets, respectively,
applicable to a future reporting period. The statement amends certain reporting requirements in GASB
Statement No. 34 and related pronouncements, providing a format for a new Statement of Net Position,
which reports deferred outflows of resources and deferred inflows of resources separately from assets and
liabilities. It also renames the residual of assets, deferred outflows of resources, liabilities, and deferred
inflows of resources as net position, rather than net assets. The requirements of this statement must be
implemented for periods beginning after December 15, 2011,with earlier implementation encouraged.
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GASB PENSION EXPOSURE DRAFTS
In June 2011, GASB issued two exposure drafts on accounting and reporting for pensions, one for the
reporting of pension benefits within the financial statements of participating employers and the other for
pension plan financial reporting. These two exposure drafts are intended to update or replace the current
guidance for pension reporting in GASB Statement Nos. 25 and 27.
The exposure drafts propose a variety of changes in financial statement presentation, measurement, and
required disclosures relating to pension benefits. Included are proposed major changes in how employers
that participate in cost-sharing defined benefit pension plans, such as TRA and PERA, account for
pension benefit expenses and liabilities. Currently, employers participating in such plans recognize
pension expenses and liabilities only to the extent of their contractually required annual contributions to
the plan. The exposure draft proposes that those employers recognize their proportionate share of the
collective net pension liability and collective pension expense for all participating employers. If adopted,
this guidance could have a significant impact on the financial statements of the participating employers,
as participants in plans with a substantial unfunded liability would be required to report their
proportionate share of the unfunded liability in their government-wide financial statements.
The proposed effective dates for both exposure drafts are for periods beginning after June 15, 2012, if
certain conditions are met, otherwise for periods beginning after June 30, 2013.
FEDERAL FUNDING ACCOUNTABILITY AND TRANSPARENCY ACT(TRANSPARENCY ACT)
Effective October 1, 2010, the Transparency Act requires federal award recipients to report specific data,
including compensation data in certain circumstances, related to subawards. One of the key requirements
of the Transparency Act was the creation of a single, searchable website that provides the public with
greater access to information on federal spending. The Transparency Act requires recipients to report
first-tier subaward and executive compensation data for new federal grants as of October 1, 2010, if the
initial award is equal to or over$25,000. Pass through entities (primary recipients) must report subaward
data through the Federal Funding Accountability and Transparency Subaward Reporting System (FSRS)
by the end of the month following the month in which the subaward obligation is made. For a more
detailed discussion of the Transparency Act see Part 3, Section L of the 2011 U.S. Office of Management
and Budget(OMB) Circular A-133 Compliance Supplement available at www.whitehouse.gov/omb. The
OMB has issued several documents that provide guidance on the Transparency Act, including Open
Government Directive Federal Spending Transparency and Subaward and Compensation Data
Reporting, available at www.whitehouse.gov/omb/open.
GASB PRELIMINARY VIEWS: ECONOMIC CONDITION REPORTING AND FINANCIAL PROJECTIONS
In November 2011, GASB issued a preliminary views document on the reporting of economic conditions
of a governmental entity.
GASB's preliminary view is that five components of information are necessary to assist users in assessing
a governmental entity's fiscal sustainability:
• Projections of the total cash inflows and major individual cash inflows, in dollars and as a
percentage of total cash inflows, with explanations of the known causes of fluctuations in cash
inflows.
• Projections of the total cash outflows and major individual cash outflows, in dollars and as a
percentage of total cash outflows, with explanations of the known causes of fluctuations in cash
outflows.
• Projections of the total financial obligations and major individual financial obligations, including
bonds, pensions, other post-employment benefits, and long-term contracts, with explanations of
the known causes of fluctuations in financial obligations.
• Projections of annual debt service payments (principal and interest).
• Narrative discussion of the major intergovernmental service interdependencies that exist and the
nature of those service interdependencies.
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All of the components of fiscal sustainability information are believed to be essential for placing the basic
financial statements and notes to basic financial statements in an operational or economic context and,
therefore, would be required and communicated as required supplementary information. All
governmental entities would be required to report the components of fiscal sustainability information.
The comment period for this document ended March 16, 2012. No further information is currently
available.
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