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HomeMy WebLinkAbout2018 Brooklyn Center Mgmt Rpt Management Report for City of Brooklyn Center, Minnesota December 31, 2018 THIS PAGE INTENTIONALLY LEFT BLANK C E R T I F I E D A C C O U N T A N T S P UBLIC PRINCIPALS Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA/CMA Jaclyn M. Huegel, CPA Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 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, Minnesota’s (the City) financial statements for the year ended December 31, 2018. We have organized this report into the following sections: • Audit Summary • Governmental Funds Overview • Enterprise Funds Overview • Government-Wide Financial Statements • Legislative Updates • 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. The purpose of this report is solely to provide those charged with governance of the City, management, and those who have responsibility for oversight of the financial reporting process comments resulting from our audit process and information relevant to city finances in Minnesota . Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota May 15, 2019 THIS PAGE INTENTIONALLY LEFT BLANK -1- AUDIT SUMMARY The following is a summary of our audit work, key conclusions, and other information that we consider important or that is required to be communicated to the City Council, administration, or those charged with governance of the City. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA, GOVERNMENT AUDITING STANDARDS, AND TITLE 2 U.S. CODE OF FEDERAL REGULATIONS (CFR) PART 200, UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS (UNIFORM GUIDANCE) 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, 2018. 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 the Uniform Guidance, 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, 2018: • We have issued an unmodified opinion on the City’s basic financial statements. Our report included a paragraph emphasizing the City’s implementation of Governmental Accounting Standards Board (GASB) Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions during the year ended December 31, 2018. Our opinion was not modified with respect to this matter. • We reported no deficiencies in the City’s internal control over financial reporting that we considered to be material weaknesses. • The results of our testing disclosed no instances of noncompliance required to be reported under Government Auditing Standards. • We reported that the Schedule of Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial statements. • The results of our tests indicate that the City has complied, in all material respects, with the types of compliance requirements that could have a direct and material effect on each of its major federal programs. • We reported no deficiencies in the City’s internal controls over compliance that we considered to be material weaknesses with the types of compliance requirements that could have a direct and material effect on each of its major federal programs. • We reported no findings based on our testing of the City’s compliance with Minnesota laws and regulations. -2- GENERAL COMMENTS AND RECOMMENDATIONS Written Cash Management and Allowable Costs Financial Management Procedures for Uniform Guidance 2 CFR § 200.302(b) (6) and (7) requires the City to have written cash management and allowable cost procedures, which includes procedures for determining the allowability of costs in accordance with 2 CFR 200 Subpart E – Cost Principles. While the City does have written procedures, we recommend the City review the Uniform Guidance over these requirements and upgrade the language used in its written procedures to ensure future compliance with these standards by the City in these compliance areas. After the 2018 fiscal year-end, the City updated its written policies and procedures to include the cash management and allowable cost procedures under the Uniform Guidance. 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 ended December 31, 2018; however, the City implemented the following governmental accounting standards during the fiscal year: • GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which established new accounting and financial reporting requirements for governments whose employees are provided with other post-employment benefits (OPEB). • GASB Statement No. 85, Omnibus 2017, which addresses issues that have been identified during implementation and application of certain GASB statements. • GASB Statement No. 86, Certain Debt Extinguishment Issues, which improves the consistency in accounting and financial reporting for in-substance defeasances of debt. We noted no transactions entered into by the City during the year for which t here 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 t he financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: • Net Other Post-Employment Benefit (OPEB) and Pension Liabilities – The City has recorded liabilities and activity for OPEB and pension benefits. These obligations are calculated using actuarial methodologies described in GASB Statement Nos. 68 and 75. These actuarial calculations include significant assumptions, including projected changes, healthcare insurance costs, investment returns, retirement ages, proportionate share, and employee turnover. • Depreciation – Management’s estimates of depreciation expense are based on the estimated useful lives of the assets. -3- • Compensated Absences – Management’s estimate is based on current rates of pay and sick leave balances. • Assets Held for Resale – Management’s estimates of this asset are based on the lower of cost or acquisition value. We evaluated the key factors and assumptions used by management 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. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. There were no misstatements detected as a result of audit procedures that were material, either individually or in the aggregate, to each opinion unit’s financial statements taken as a whole. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. DISAGREEMENTS WITH MANAGEMENT For purposes of this report, a disagreement with management is 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 15, 2019. 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. -4- OTHER MATTERS We applied certain limited procedures to the management’s discussion and analysis (MD&A) and the pension and OPEB-related required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management ’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were engaged to report on the combining and individual fund statements and schedules accompanying the financial statements and the separately issued Schedule of Expenditures of Federal Awards, which are not RSI. With respect to this supplementary information, 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 met hod 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 to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. We were not engaged to report on the introductory section and statistical section, which accompany the financial statements, but are not RSI. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. -5- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City’s governmental funds, which includes the General, special revenue, debt service, and capital project funds. These funds are used to account for the basic services the City provides to all of its citizens, which are financed primarily with property taxes. The governmental fund information in the City’s financial statements focuses on budgetary compliance and the sufficiency of each governmental fund’s current assets to finance its current liabilities. PROPERTY TAXES Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. For the 2017 fiscal year, local ad valorem property tax levies provided 41.1 percent of the total governmental fund revenues for cities over 2,500 in population, and 37.4 percent for cities under 2,500 in population. Total property taxes levied by all Minnesota cities for taxes payable in 2018 increased 6.2 percent from the prior year, and total certified levies payable in 2019 are projected to increase by 5.6 percent. The total market value of property in Minnesota cities increased about 5.6 percent for the 2017 levy year (state-wide market value information for the 2018 levy year was not available at the time this report was issued). The market values used for levying property taxes are based on the previous fiscal year (e.g., market values for taxes levied in 2018 were based on assessed values as of January 1, 2017), so the trend of change in these market values lags somewhat behind the housing market and economy in general. The City’s taxable market value increased 5.8 percent for taxes payable in 2017 and increased 11.5 percent for taxes payable in 2018. The following graph shows the City’s changes in taxable market value over the past 10 years: $– $500,000,000 $1,000,000,000 $1,500,000,000 $2,000,000,000 $2,500,000,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Taxable Market Value -6- 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 its 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 increased 5.9 percent for taxes payable in 2017 and increased 10.0 percent for taxes payable in 2018. The following graph shows the City’s change in tax capacities over the past 10 years: $– $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Tax Capacity The following table presents the average tax rates applied to city residents for each of the last three levy years: 2016 2017 2018 Average tax rate City 71.8 70.5 67.1 County 45.4 44.1 42.8 School 54.7 40.6 46.3 Special taxing 11.2 11.0 10.4 Total 183.1 166.2 166.6 City of Brooklyn Center The total average tax rate was consistent with the prior year. An increase in the school portion was offset by decreases in the other taxing authority rates. -7- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year-to-year, due to the effect of inflation and changes in its operation. Also, certain data on these tables may be classified differently than how they appear in 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 the City. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the MD&A. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Year 2016 2017 2018 Population 2,500–10,000 10,000–20,000 20,000–100,000 31,231 31,145 31,145 Property taxes 474$ 451$ 475$ 509$ 537$ 568$ Tax increments 26 27 38 117 155 164 Franchise fees and other taxes 38 43 48 58 61 60 Special assessments 57 48 59 57 57 57 Licenses and permits 39 34 49 30 29 39 Intergovernmental revenues 322 276 147 120 125 204 Charges for services 108 103 103 28 30 34 Other 68 53 48 42 30 44 Total revenue 1,132$ 1,035$ 967$ 961$ 1,024$ 1,170$ December 31, 2017 Governmental Funds Revenue per Capita With State-Wide Averages by Population Class State-Wide City of Brooklyn Center 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 2018 was $1,170, an increase of about 14.3 percent from the prior year. Property tax revenue increased $31 per capita, due to the increased tax levy. Intergovernmental revenues increased $79 per capita, due to the federal grant received for the Brooklyn Boulevard improvement project. -8- The expenditures of governmental funds will also vary from state -wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor . Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Year 2016 2017 2018 Population 2,500–10,000 10,000–20,000 20,000–100,000 31,231 31,145 31,145 Current General government 147$ 120$ 101$ 96$ 104$ 119$ Public safety 270 259 287 330 352 366 Street maintenance 128 127 101 68 70 75 Parks and recreation 96 112 99 86 88 90 All other 76 64 77 191 77 88 717$ 682$ 665$ 771$ 691$ 738$ Capital outlay and construction 403$ 319$ 263$ 192$ 328$ 315$ Debt service Principal 228$ 147$ 121$ 87$ 112$ 105$ Interest and fiscal 44 35 32 31 22 24 272$ 182$ 153$ 118$ 134$ 129$ Total expenditures 1,392$ 1,183$ 1,081$ 1,081$ 1,153$ 1,182$ State-Wide December 31, 2017 Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Brooklyn Center 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 public safety costs. The City’s per capita current expenditures increased $47 per capita in 2018, mainly due to the $15 per capita increase in general government and $14 per capita increase in public safety. Capital outlay costs per capita decreased $13 in the current year. -9- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2018, presented both by fund balance classification and by fund: Increase 2018 2017 (Decrease) Fund balances of governmental funds Total by classification Nonspendable 90,472$ 113,610$ (23,138)$ Restricted 26,097,132 23,888,356 2,208,776 Committed 9,007,923 9,678,002 (670,079) Assigned 1,541,166 717,167 823,999 Unassigned 10,102,668 9,428,584 674,084 Total – governmental funds 46,839,361$ 43,825,719$ 3,013,642$ Total by fund General 11,563,825$ 11,355,203$ 208,622$ Tax Increment District No. 3 19,557,596 17,984,598 1,572,998 Debt Service 2,816,343 1,837,237 979,106 Capital Improvements 2,043,360 3,036,868 (993,508) Municipal State Aid for Construction 289,415 (381,395) 670,810 Special Assessment Construction 1,534,666 567,537 967,129 Nonmajor funds 9,034,156 9,425,671 (391,515) Total – governmental funds 46,839,361$ 43,825,719$ 3,013,642$ Governmental Funds Change in Fund Balance Fund Balance as of December 31, In total, the fund balances of the City’s governmental funds increased by $3,013,642 during the year ended December 31, 2018. The majority of the increase was in restricted fund balances. Restricted fund balances increased $2,208,776, mainly in the restricted fund balance in the Tax Increment District No. 3 Fund and Debt Service Fund. -10- 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 operation, police and fire protection, building inspection, streets and highway maintenance, and parks and recreation. The graph below illustrates the change in the General Fund financial position over the last five years. We have also included a line representing annual expenditures to reflect the change in the size of the General Fund operation over the same period. 2014 2015 2016 2017 2018 Fund Balance $11,020,081 $11,170,917 $11,440,897 $11,355,203 $11,563,825 Cash (Net)$11,754,777 $11,602,236 $12,326,654 $12,057,840 $12,199,624 Expenditures $17,503,674 $18,047,798 $18,849,079 $19,873,539 $21,181,481 $– $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 $18,000,000 $20,000,000 $22,000,000 General Fund Financial Position Year Ended December 31, The City’s General Fund cash and investments balance (net of interfund borrowing) at December 31, 2018 was $12,199,624, which increased $141,784 from 2017. Total fund balance at December 31, 2018 was $11,563,825, an increase of $208,622 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, 2018, the City’s General Fund had an unassigned fund balance of 51 percent of the subsequent year’s budgeted expenditures. -11- The following graph reflects the City’s General Fund revenue sources for 2018 compared to budget: Other Charges for Services Intergovernmental Licenses and Permits Taxes General Fund Revenue Budget Actual Total General Fund revenues for 2018 were $21,683,533, which was $487,497 (2.3 percent) over the final budget. The majority of this variance was from licenses and permits. Licenses and permits revenue was $432,404 over budget from more than anticipated building-related activities. 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 virtual elimination of general state aid revenue in recent years. Taxes Intergovernmental Other 2014 $14,991,781 $1,401,447 $2,472,394 2015 $15,532,039 $1,410,695 $2,230,529 2016 $16,128,373 $1,466,341 $2,397,091 2017 $16,766,847 $1,496,165 $2,275,377 2018 $17,361,854 $1,658,391 $2,663,288 $– $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 $18,000,000 General Fund Revenue by Source Year Ended December 31, Overall, General Fund revenues increased $1,145,144 (5.6 percent) from the previous year, mainly in tax revenue and other revenue. Tax revenue increased $595,007, mainly due to the increased property tax levy approved by the City Council for 2018. Other revenue increased $387,911, mainly due to the increased licenses and permits revenue as previously discussed. -12- The following graph illustrates the components of General Fund spending for 2018 compared to budget: Other Parks and Recreation Public Works Public Safety General Government General Fund Expenditures Budget Actual Total General Fund expenditures for 2018 were $21,181,481, which was $35,445 (0.2 percent) more than budget. Parks and recreation expenditures were $180,566 under budget mainly in the community center department, due to open staff positions during the year and the delay of equipment purchases. Public safety expenditures were $92,772 under budget in the police protection department, due to open staff positions during the year. Public works expenditures were $43,290 under budget in the engineering and street departments. These budget variances were offset by the other expenditures and general government expenditures, which were $242,988 and $109,085 over budget, respectively. Other expenditures were over budget, due to increased nondepartmental expenditures. General government expenditures were over budget, mainly in the government buildings department. The following graph presents the City’s General Fund expenditures by function for the last five years: General Government Public Safety Public Works Parks and Recreation Other 2014 $2,745,046 $9,444,438 $1,963,110 $2,406,617 $944,463 2015 $2,769,009 $9,809,177 $1,880,792 $2,492,260 $1,096,560 2016 $3,019,888 $10,067,963 $1,918,330 $2,627,958 $1,214,940 2017 $3,223,766 $10,687,408 $2,037,136 $2,703,475 $1,221,754 2018 $3,605,573 $11,201,317 $2,234,407 $2,761,005 $1,379,179 $– $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 $11,000,000 $12,000,000 General Fund Expenditures by Function Year Ended December 31, General Fund expenditures increased by $1,307,942, or 6.6 percent, from the prior year, mainly due to the $513,909 increase in the public safety function, the $381,807 increase in the general government function, and the $197,271 increase in the public works function. Public safety expenditures increased, mainly due to increased personal services in the police protection department. The increase in the general government function is due to the newly created communications and engagement department. The public works function increased in the engineering and street departments. -13- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which include the Municipal Liquor, Golf Course, Earle Brown Heritage Center, Water Utility, Sanitary Sewer Utility, Storm Drainage Utility, Street Light Utility, and Recycling Utility Funds. The utility funds comprise a considerable portion of the City’s activities. These funds significantly help to defray overhead and administrative costs and provide additional support to general government operations by way of annual transfers. We understand that the City is proactive in reviewing these activities on an ongoing basis and we want to reiterate the importance of continually monitoring these operations. Over the years, we have emphasized to our city clients the importance of these utility operations being self-sustaining, preventing additional burdens on general government funds . This would include the accumulation of net position for future capital improvements and to provide a cushion in the event of a negative trend in operations. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2018, presented both by classification and by fund: Increase 2018 2017 (Decrease) Net position of enterprise funds Total by classification Net investment in capital assets 42,831,977$ 43,553,672$ (721,695)$ Unrestricted 18,347,909 16,948,871 1,399,038 Total – enterprise funds 61,179,886$ 60,502,543$ 677,343$ Total by fund Municipal Liquor 2,889,498$ 2,782,025$ 107,473$ Golf Course – 649,127 (649,127) Earle Brown Heritage Center 5,937,528 5,911,936 25,592 Water Utility 13,413,803 13,365,377 48,426 Sanitary Sewer Utility 14,994,868 14,874,105 120,763 Storm Drainage Utility 21,779,268 21,126,564 652,704 Street Light Utility 1,882,448 1,544,688 337,760 Recycling Utility 282,473 248,721 33,752 Total – enterprise funds 61,179,886$ 60,502,543$ 677,343$ Enterprise Funds Change in Financial Position Net Position as of December 31, In total, the net position of the City’s enterprise funds increased by $677,343 during the year ended December 31, 2018. The City recorded a prior period adjustment in the current year to record premiums and discounts on debt issuances, reducing net position by $417,622 while current year operating results increased net position by $1,094,965. As discussed later in this report, the golf course operations were transferred to a special revenue fund as of December 31, 2018. -14- Water Fund The following graph presents five years of operating results for the Water Fund: 2014 2015 2016 2017 2018 Oper Rev $2,206,311 $2,573,493 $3,191,538 $3,543,323 $3,807,272 Oper Exp $1,838,841 $2,008,333 $2,681,066 $3,158,986 $3,270,522 Oper Inc (Loss)$367,470 $565,160 $510,472 $384,337 $536,750 Oper Inc Excl Dep $1,025,633 $1,269,093 $1,654,136 $2,019,592 $2,130,291 $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 $2,750,000 $3,000,000 $3,250,000 $3,500,000 $3,750,000 $4,000,000 Water Fund Year Ended December 31, The Water Fund ended 2018 with a net position of $13,413,803, an increase of $48,426 from the prior year, which includes a prior period adjustment decline of $227,353. Of this, $10,380,350 represents the net investment in utility distribution system capital assets, leaving $3,033,453 of unrestricted net position. Water Fund operating revenue was $3,807,272 for 2018, an increase of $263,949 (7.4 percent) from the prior year, due to an increase in consumption in the current year. Operating expenses of $3,270,522 were $111,536 (3.5 percent) more than last year, mainly due to an increase in other services expense in the current year. -15- Sanitary Sewer Fund The following graph presents five years of operating results for the Sanitary Sewer Fund: 2014 2015 2016 2017 2018 Oper Rev $3,945,115 $4,093,725 $4,204,962 $4,287,674 $4,406,741 Oper Exp $3,496,064 $3,656,994 $3,812,606 $3,969,011 $4,121,002 Oper Inc (Loss)$449,051 $436,731 $392,356 $318,663 $285,739 Oper Inc Excl Dep $1,184,646 $1,220,231 $1,209,977 $1,216,466 $1,188,019 $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 $2,750,000 $3,000,000 $3,250,000 $3,500,000 $3,750,000 $4,000,000 $4,250,000 $4,500,000 Sanitary Sewer Fund Year Ended December 31, The Sanitary Sewer Fund ended 2018 with a net position of $14,994,868, an increase of $120,763 from the prior year, which includes a prior period adjustment decline of $145,562. Of this, $10,388,432 represents the net investment in the sanitary sewer capital assets, leaving $4,606,436 of unrestricted net position. Sanitary Sewer Fund operating revenues for 2018 were $4,406,741, which was an increase of $119,067 (2.8 percent) from the prior year, due to an increase in consumption. Operating expenses for 2018 were $4,121,002, which was an increase of $151,991 (3.8 percent) from the prior year. The largest operating expense of this fund is to Metropolitan Council Environmental Services (MCES) for sewer service charges. MCES disposal charges in 2018 increased by $76,670 from the prior year. -16- Storm Drainage Fund The following graph presents five years of operating results for the Storm Drainage Fund: 2014 2015 2016 2017 2018 Oper Rev $1,638,475 $1,635,555 $1,620,302 $1,598,374 $1,681,234 Oper Exp $1,787,064 $1,875,824 $1,700,595 $1,815,673 $1,881,402 Oper Inc (Loss)$(148,589)$(240,269)$(80,293)$(217,299)$(200,168) Oper Inc Excl Dep $907,185 $866,007 $1,065,816 $1,060,584 $1,109,286 $(400,000) $(200,000) $– $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 Storm Drainage Fund Year Ended December 31, The Storm Drainage Fund ended 2018 with a net position of $21,779,268, an increase of $652,704 from the prior year, which includes a prior period adjustment decline of $44,707. Of this, $17,338,452 represents the net investment in capital assets, leaving $4,440,816 of unrestricted net position. Storm Drainage Fund operating revenues for 2018 were $1,681,234, which was an increase of $82,860 from the prior year, due to an approved rate increase. Operating expenses for 2018 were $1,881,402, which was $65,729 higher than the prior year, due to increased depreciation expense in the current year. The Storm Drainage Fund received capital contributions of $906,963 from governmental activities in the current year. -17- OTHER ENTERPRISE FUNDS Liquor Fund The following graph presents five years of operating results for the Liquor Fund: 2014 2015 2016 2017 2018 Sales $5,852,465 $6,056,668 $6,197,094 $6,495,300 $6,743,790 Cost of Sales $4,293,383 $4,431,501 $4,611,919 $4,769,844 $4,865,400 Oper Exp $1,354,123 $1,367,050 $1,465,790 $1,434,340 $1,613,573 Oper Inc (Loss)$204,959 $258,117 $119,385 $291,116 $264,817 Oper Inc Excl Dep $229,287 $275,083 $140,379 $312,919 $286,620 $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000 $5,500,000 $6,000,000 $6,500,000 $7,000,000 Liquor Fund Year Ended December 31, The Liquor Fund ended 2018 with a net position of $2,889,498, an increase of $107,473 from the prior year. Of the net position balance, $81,788 represents the net investment in liquor capital assets, leaving $2,807,710 of unrestricted net position. Liquor sales for 2018 were $6,743,790, which is $248,490 (3.8 percent) more than the prior year. The Liquor Fund generated operating income of $264,817 in 2018, or about 3.9 percent of gross sales, which is a decrease from the 4.5 percent of gross sales in fiscal 2017. In 2018, the Liquor Fund transferred $185,707 to the Capital Improvements Fund for future capital projects. The Liquor Fund gross profit margin was 27.85 in fiscal 2018, which is higher than the average gross profit margin of 26.80 seen over the previous five years. -18- Earle Brown Heritage Center Fund The following graph presents five years of operating results for the Earle Brown Heritage Center Fund: 2014 2015 2016 2017 2018 Sales and User Fees $4,518,231 $4,487,260 $4,700,175 $4,891,574 $4,844,775 Cost of Sales $2,089,293 $2,033,464 $2,066,065 $2,257,315 $2,208,993 Oper Exp $3,048,763 $2,689,723 $2,388,597 $2,519,580 $2,660,841 Oper Inc (Loss)$(619,825)$(235,927)$245,513 $114,679 $(25,059) Oper Inc Excl Dep $63,800 $384,322 $427,518 $293,066 $174,805 $(800,000) $(400,000) $– $400,000 $800,000 $1,200,000 $1,600,000 $2,000,000 $2,400,000 $2,800,000 $3,200,000 $3,600,000 $4,000,000 $4,400,000 $4,800,000 $5,200,000 Earle Brown Heritage Center Fund Year Ended December 31, The Earle Brown Heritage Center Fund ended 2018 with a net position of $5,937,528, an increase of $25,592 from the prior year. Of the net position balance, $3,623,415 represents investments in Earle Brown Heritage Center capital assets, leaving $2,314,113 of unrestricted net position. Earle Brown Heritage Center Fund sales and user fees for 2018 were $4,844,775, which is $46,799 (1.0 percent) less than last year. Operating expenses for 2018 were $2,660,841, an increase of $141,261 from the prior year. The increase in operating expense is mainly due to increased personal services. During fiscal 2018, this fund experienced depreciation expense totaling $199,864. -19- Golf Course Fund The following graph presents five years of operating results for the Golf Course Fund: 2014 2015 2016 2017 2018 Oper Rev $183,311 $208,225 $221,604 $212,130 $224,104 Oper Exp $271,229 $267,627 $302,202 $327,749 $333,377 Oper Inc (Loss)$(87,918)$(59,402)$(80,598)$(115,619)$(109,273) Oper Inc (Loss) Excl Dep $(69,180)$(40,665)$(61,810)$(96,882)$(90,536) $(150,000) $(100,000) $(50,000) $– $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 Golf Course Fund Year Ended December 31, The Golf Course Fund operating revenues for 2018 were $224,104, which is $11,974 higher than last year. Operating expenses for 2018 were $333,377, up $5,628 from the prior year. During the 2018 year, the City Council approved a resolution to forgive the outstanding balance of the interfund advance made from the Capital Improvements Fund to the Golf Course Fund. The City Council also approved a resolution to reclassify the Golf Course Fund to a special revenue fund. As of December 31, 2018, the golf course operations were transferred to a governmental special revenue fund and the capital assets were properly transferred to governmental activities. THIS PAGE INTENTIONALLY LEFT BLANK -20- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities 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 financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents 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 Position divides the net position into three components: • Net Investment in Capital Assets – The portion of net position reflecting equity in capital assets (i.e., capital assets minus related debt). • Restricted Net Position – The portion of net position equal to resources whose use is legally restricted minus any noncapital-related liabilities payable from those same resources. • Unrestricted Net Position – The residual balance of net position after the elimination of net investment in capital assets and restricted net position. The following table presents the components of the City’s net position as of December 31, 2018 and 2017 for governmental activities and business-type activities: Increase 2018 2017 (Decrease) Net position Governmental activities Net investment in capital assets 52,794,327$ 53,152,985$ (358,658)$ Restricted 30,501,419 27,309,336 3,192,083 Unrestricted 3,010,220 1,400,658 1,609,562 Total governmental activities 86,305,966 81,862,979 4,442,987 Business-type activities Net investment in capital assets 42,831,977 43,553,672 (721,695) Unrestricted 15,827,178 14,613,409 1,213,769 Total business-type activities 58,659,155 58,167,081 492,074 Total net position 144,965,121$ 140,030,060$ 4,935,061$ As of December 31, The City’s total net position at December 31, 2018 was $4,935,061 higher than the previous year-end. Of the increase, $4,442,987 came from governmental activities and $492,074 came from business-type activities. The increase in both of these is due to the positive operating results of the City as a whole. As discussed earlier, the City recorded a change in accounting principle for reporting OPEB that reduced beginning unrestricted net position by $894,030. The City also recorded two prior period adjustments that reduced beginning net investment in capital assets by $1,075,058 and $1,209,231, respectively, to record premiums and discounts on debt issuances and to properly restate construction in progress for an improvement project that should have been expensed in previous years. -21- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in the net position of the City for the years ended December 31, 2018 and 2017: 2017 Program Expenses Revenues Net Change Net Change Governmental activities General government 4,426,549$ 483,572$ (3,942,977)$ (3,477,391)$ Public safety 11,757,362 2,347,881 (9,409,481) (10,534,953) Public works 6,501,746 6,147,101 (354,645) (3,014,157) Community service 164,544 – (164,544) (143,103) Parks and recreation 3,234,386 689,646 (2,544,740) (2,194,650) Economic development 2,543,381 441,031 (2,102,350) (1,391,360) Interest on long-term debt 693,575 – (693,575) (540,799) Business-type activities Municipal liquor 6,478,599 6,745,617 267,018 261,096 Golf course 333,768 224,535 (109,233) (122,859) Earle Brown Heritage Center 4,874,026 4,858,384 (15,642) 91,678 Water utility 3,670,089 3,888,716 218,627 291,252 Sanitary sewer utility 4,213,511 4,406,741 193,230 220,187 Storm drainage utility 1,959,195 1,681,733 (277,462) (250,263) Street light utility 274,252 478,248 203,996 187,224 Recycling utility 385,811 416,539 30,728 38,161 Total net (expense) revenue 51,510,794$ 32,809,744$ (18,701,050) (20,579,937) General revenues Property taxes 17,650,461 16,736,759 Tax increments 5,147,964 4,652,373 Lodging taxes 1,167,961 1,206,565 Grants and contributions not restricted to specific programs 2,065,832 1,701,232 Unrestricted investment earnings 701,426 431,423 Gain on disposal of capital assets 80,786 88,326 Total general revenues 26,814,430 24,816,678 Change in net position 8,113,380$ 4,236,741$ Net (expense) revenue 2018 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. -22- LEGISLATIVE UPDATES The 2018 legislative session, falling in the second half of the state’s fiscal biennium, was a short session in which only two major finance-related bills were passed, omnibus bonding bills related to bonding, and pensions. The following is a brief summary of specific legislative changes from the 2018 session or previous legislative sessions potentially impacting Minnesota cities. Omnibus Bonding Bill – The omnibus bonding bill authorized financing for over $1.5 billion in capital improvements. Included in the approved funding was $542 million for various transportation infrastructure, $99 million for local city-related economic development projects, and appropriations for a number of different utility (water, sewer, wastewater, etc.) infrastructure improvement programs. Wastewater Investment Protection – Effective retroactively back to August 1, 2017, when a city builds a new wastewater treatment facility or upgrades one to meet current standards that exceed its previous performance, the investment in that facility would be considered adequate for a period of 16 years before a city could be required to upgrade the facility again to meet updated state wastewater facility standards. Competitive Bidding Threshold – Effective for contracts awarded on or after August 1, 2018, the dollar threshold at which Minnesota Statutes require the use of a sealed bidding process was raised from $100,000 to $175,000. This extends the dollar range for which contracts may be awarded using direct negotiation (obtaining two quotations) to contracts between $25,000 and $175,000. By reference, this change also increased the dollar threshold at which public contractors’ performance and payment bonds are required for contracts over $175,000. Water Tank Maintenance Contracts – Effective for contracts awarded on or after September 1, 2018, multi-year service contracts for water tank maintenance work that were previously allowed to be awarded through direct negotiation, are required to be awarded through a sealed bid or best value bid procurement process when the total cost of the contract for the services and supplies is expected to exceed the competitive bid threshold of $175,000. Minnesota Licensing and Registration System (MNLARS) – The Legislature established the MNLARS steering committee, and a one-time appropriation of $9.65 million was approved for fiscal year 2018 to fund costs related to the continued development, improvement, operation, and deployment of the MNLARS. However, a bill to provide an additional proposed appropriation of $9 million to partially compensate deputy registrars throughout the state for financial losses related to the flawed rollout of the MNLARS was vetoed by the Governor. Pension Benefit Reforms – The 2018 pension bill included a number of reforms to the various defined benefit pension plans across the state, including the plans administered by the Public Employees Retirement Association (PERA). • Reforms impacting the PERA General Employees Retirement Fund (GERF) plan included: o Post-retirement cost of living adjustments (COLAs) will be equal to 50.0 percent of the annual increase for Social Security, but not less than 0.5 percent , and not more than 1.5 percent. o For early retirees that retire on or after January 1, 2024, COLAs are deferred until the retiree reaches the normal retirement age. o Phases in actuarial reduction factors over five year on early retirement benefits payable beginning July 1, 2019. o The rate of interest paid on refunds of employee contributions to former public employees was reduced from an annual rate of 4.0 percent to 3.0 percent. -23- • Reforms impacting the PERA Public Employees Police and Fire Fund (PEPFF) plan included: o Post-retirement COLAs were permanently set at 1.00 percent. o Employer contribution rates increase from the current 16.20 percent of covered salaries to 16.95 percent beginning January 1, 2019, and 17.70 percent beginning January 1, 2020. o Employee contribution rates increase from the current 10.80 percent of covered salaries to 11.30 percent beginning January 1, 2019, and 11.80 percent beginning January 1, 2020. o To reduce the need for additional contribution increases, the state will contribute an additional $4.5 million to the plan annually for fiscal years 2019 and 2020, increasing to $9.0 million annually thereafter through fiscal 2048, or until the plan is fully funded. o The rate of interest paid on refunds of employee contributions to former public employees was reduced from an annual rate of 4.00 percent to 3.00 percent. • Reforms impacting the volunteer firefighter relief associations plan included: o Added a requirement that the fire chief annually certify each firefighter’s service credit to the relief association and the related municipality effective January 1, 2019. -24- ACCOUNTING AND AUDITING UPDATES GASB STATEMENT NO. 83, CERTAIN ASSET RETIREMENT OBLIGATIONS This statement addresses accounting and financial reporting for certain asset retirement obligations (ARO), which are legally enforceable liabilities associated with the retirement of a tangible capital asset. This statement establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for ARO. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability when it is both incurred and reasonably estimable. The measurement of an ARO is required to be based on the best estimate of the current value of outlays expected to be incurred, and a deferred outflow of resources associated with an ARO is required to be measured at the amount of the corresponding liability upon initial measurement. This statement requires the current value of a government’s AROs to be adjusted for the effects of general inflation or deflation at least annually, and a government to evaluate all relevant factors at least annually to determine whether the effects of one or more of the factors are expected to significantly change the estimated asset retirement outlays. A government should remeasure an ARO only when the resul t of the evaluation indicates there is a significant change in the estimated outlays. Deferred outflows of resources should be reduced and recognized as outflows of resources in a systematic and rational manner over the estimated useful life of the tangible capital asset. If a government owns a minority interest in a jointly owned tangible asset where a nongovernmental entity is the majority owner or has operational responsibility for the jointly owned asset, the government’s minority share of an ARO should be reported using the measurement produced by the nongovernmental majority owner or the nongovernmental minority owner that has operational responsibility, without adjustment to conform to the liability measurement and recognition requirements of this statement. The statement also requires disclosures of any funding or financial assurance requirements a government has related to the performance of asset retirement activities, along with any assets restricted for the payment of the government’s AROs. This statement also requires disclosure of information about the nature of a government’s AROs, the methods and assumptions used for the estimates of the liabilities, and the estimated remaining useful life of the associated tangible capital assets. If an ARO (or portions thereof) has been incurred by a government but is not yet recognized because it is not reasonably estimable, the government is required to disclose that fact and the reasons therefor. This statement requires similar disclosures for a government’s minority shares of AROs. The requirements of this statement are effective for reporting periods beginning after June 15, 2018. Earlier application is encouraged. GASB STATEMENT NO. 84, FIDUCIARY ACTIVITIES This statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity, and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and post-employment benefit arrangements that are fiduciary activities. -25- An activity meeting the criteria should be reported in a fiduciary fund in the basic financial statements, which should present a statement of fiduciary net position and a statement of changes in fiduciary net position. This statement describes four fiduciary funds that should be reported, if applicable: (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) private -purpose trust funds, and (4) custodial funds. Custodial funds generally should report fiduciary activities that are not held in a trust or equivalent arrangement that meets specific criteria. A fiduciary component unit, when reported in the fiduciary fund financial statements of a primary government, should combine its information with its component units that are fiduciary component units and aggregate that combined information with the primary government’s fiduciary funds. This statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources, defined as when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets. The requirements of this statement are effective for reporting periods beginning after December 15, 2018 . Earlier application is encouraged. GASB STATEMENT NO. 87, LEASES A lease is a contract that transfers control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange -like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this statement. Governments enter into leases for many types of assets. Under the previous guidance, leases were classified as either capital or operating depending on whether the lease met any of the four tests. In many cases, the previous guidance resulted in reporting lease transactions differently than similar nonlease financing transactions. The goal of this statement is to better meet the information needs of users by improving accounting and financial reporting for leases by governments. It establishes a single model for lease accounting based on the principle that leases are financings of the right-to-use an underlying asset. This statement increases the usefulness of financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. Under this statement, a lessee is required to recognize a lease liability and an intangible right -to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. To reduce the cost of implementation, this statement includes an exception for short-term leases, defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probabi lity of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract. The requirements of this statement are effective for reporting periods beginning after December 15, 2019. -26- GASB STATEMENT NO. 88, CERTAIN DISCLOSURES RELATED TO DEBT, INCLUDING DIRECT BORROWINGS AND DIRECT PLACEMENTS The primary objective of this statement is to improve the information that is disclosed in notes to government financial statements related to debt, including direct borrowings and direct placements. It also clarifies which liabilities governments should include when disclosing information related to debt. The requirements of this statement will improve financial reporting by providing users of financial statements with essential information that currently is not consistently provided. In addition, information about resources to liquidate debt and the risks associated with changes in terms associated with debt will be disclosed. As a result, users will have better information to understand the effects of debt on a government’s future resource flows. This statement defines debt for purposes of disclosure in notes to financi al statements as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. The statement requires that additional essential information related to debt be disclosed in notes to financial statements, including unused lines of credit; assets pledged as collateral for the debt; and terms specified in debt agreements related to significant events of default with finance-related consequences, significant termination events with finance-related consequences, and significant subjective acceleration clauses. It also requires that existing and additional information be provided for direct borrowings and direct placements of debt separately from other debt. The requirements of this statement are effective for reporting periods beginning after June 15, 2018. GASB STATEMENT NO. 89, ACCOUNTING FOR INTEREST COST INCURRED BEFORE THE END OF A CONSTRUCTION PERIOD The objectives of this statement are to enhance the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and to simplify accounting for interest cost incurred before the end of a construction period. This statement requires that interest cost incurred before the end of a construction period be recognized as an expense in the period in which the cost is incurred for financial statements prepared using the economic resources measurement focus. As a result, interest cost incurred before the end of a construction period will no longer be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund. This statement also reiterates that in financial statements prepared using the current financial resources measurement focus, interest cost incurred before the end of a construction period should continue to be recognized as an expenditure on a basis consistent with governmental fund accounting principles. The requirements of this statement are effective for reporting periods beginning after December 15, 2019. Earlier application is encouraged. The requirements of this statement should be applied prospectively. -27- GASB STATEMENT NO. 90, MAJORITY EQUITY INTEREST—AN AMENDMENT OF GASB STATEMENTS NO. 14 AND NO. 61 The primary objectives of this statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and to improve the relevance of financial statement information for certain component units. It specifies that a majority equity interest in a legally separate organization should be reported as an investment if a government’s holding of the equity interest meets the definition of an investment. It further specifies that such investments should generally be measured using the equity method, unless it is held by a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment (including permanent and term endowments) or permanent fund, in which case the majority equity interest should be measured at fair value. All other holdings of a majority equity interest in a legally separate organization that do not meet the definition of an investment result in the government being financially accountable for the legally separate organization and, therefore, the government should report that organization as a component unit, and should report an asset related to the majority equity interest using the equity method. This statement also requires that a component unit in which a government has a 100 percent equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired a 100 percent equity interest in the component unit. Transactions presented in flows statements of the component unit in that circumstance should include only transactions that occurred subsequent to the acquisition. The requirements of this statement are effective for reporting periods beginning after December 15, 2018. Earlier application is encouraged. The requirements should be applied retroactively, except for the provisions related to reporting a majority equity interest in a component unit and reporting a component unit if the government acquires a 100 percent equity interest, which should be applied prospectively. UNIFORM GUIDANCE, MICRO-PURCHASE THRESHOLD Under the Uniform Guidance for federal programs, a micro-purchase is one for goods or services that, due to its relatively low value, does not require the government to abide by many of its ordinary competitive procedures, including small business set-asides. Because the contract is theoretically such a low amount, the contracting officer can pick virtually whatever company and product he or she wants to satisfy the procurement, so long as the price is reasonable. The standard micro-purchase threshold has been amended to increase the threshold to $10,000, effective June 20, 2018. Entities are not required to increase the micro-purchase and simplified acquisition thresholds but, if they wish to do so, they must update their procurement policies and procedures to reflect the change in thresholds. They cannot retroactively make these changes effective prior to June 20, 2018.