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2019 Management Report Management Report for City of New Hope, Minnesota December 31, 2019 THIS PAGE INTENTIONALLY LEFT BLANK To the City Council and Management City of New Hope, Minnesota We have prepared this management report in conjunction with our audit of the City of New Hope, Minnesota’s (the City) financial statements for the year ended December 31, 2019. 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, 2020 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 Kalen T. Karnowski, 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 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 AND GOVERNMENT AUDITING STANDARDS 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, 2019. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you verbally and in our audit engagement letter . Professional standards also require that we communicate 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, 2019: • We issued an unmodified opinion on the City’s basic financial statements. • We reported no deficiencies in the City’s internal control over financial reporting tha t 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 no findings based on our testing of the City’s compliance with Minnesot a laws and regulations. OTHER OBSERVATIONS AND RECOMMENDATIONS – COVID-19 Shortly after the end of the 2019 fiscal year, the onset of the novel coronavirus (COVID-19) pandemic caused substantial volatility in economic conditions and tremendous disruption in the way governments, businesses, and individuals function. Minnesota cities may experience the impact of this pandemic in a myriad of financial areas, such as: declines in investment rates of return, cash flow issues, increased utility billing and property tax delinquencies, significant increases in the number and frequency of employees working remotely, challenges in processing general and payroll disbursements, disruption of prescribed internal control procedures, delays in internal and external financial reporting, and new compliance requirements attached to potential federal relief subsidies. As your city adapts to the new normal of municipal operations in a post-COVID-19 world, the assessment of and responses to new risks that may accompany operational changes will be critical to the safeguarding of city resources and sound financial stewardship. We encourage management and governance to include a robust financial risk assessment process when planning responses to these challenges, and to reassess and adapt internal controls over financial transactions and reporting to align with significant changes made to daily operations, even those intended to be temporary. -2- 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, 2019; however, the City implemented the following governmental accounting standards during the fiscal year: • Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities, which established new criteria for identifying and reporting fiduciary activities. • GASB Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements, which improved and clarified the information to be disclosed in notes to government financial statements related to debt, including direct borrowings and direct placements. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: • Value of Land Held for Resale – These assets are stated at the lower of cost or acquisition value based on management’s estimates. • Depreciation – Management’s estimates of depreciation expense are based on the estimated useful lives of the assets. • Compensated Absences – Management’s estimate is based on current rates of pay; vacation, wellness, personal, and sick leave balances; and the likelihood that accrued sick leave will ultimately be paid at termination. • Pension and Other Post-Employment Benefit (OPEB) Liabilities – The City has recorded liabilities and activity for pension benefits and other post-employment benefits (OPEB). 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. We evaluated the key factors and assumptions used by management in the areas discussed above in determining that they are reasonable in relation to the basic financial statements taken as a whole. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The disclosures included in the notes to the basic financial statements related to OPEB and pension benefits are particularly sensitive, due to the materiality of the liabilities, and the large and complex estimates involved in determining the disclosures. The financial statement disclosures are neutral, consistent, and clear. -3- 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, 2020. 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 financial statements and schedules accompanying the financial statements, which are not RSI. With respect to this supplemental 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 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 supplemental information 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 and statistical sections, 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 2018 fiscal year, local ad valorem property tax levies provided 41.5 percent of the total governmental fund revenues for cities over 2,500 in population, and 36.7 percent for cities under 2,500 in population. Total property taxes levied by all Minnesota cities for taxes payable in 2019 in creased 5.6 percent from the prior year. The total tax capacity value of property in Minnesota cities increased about 7.1 percent for the 2019 levy year. The tax capacity values used for levying property taxes are based on the assessed market values for the previous fiscal year (e.g., tax capacity values for taxes levied in 2019 were based on assessed market values as of January 1, 2018), so the trend of change in these tax capacity values lags somewhat behind the housing market and economy in general. The City’s taxable market value increased 10.6 percent for taxes payable in 2018 and 7.9 percent for taxes payable in 2019. The following graph shows the City’s changes in taxable market value over the past 10 years: $– $300,000,000 $600,000,000 $900,000,000 $1,200,000,000 $1,500,000,000 $1,800,000,000 $2,100,000,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 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 10.1 percent for taxes payable in 2018 and 6.4 percent for taxes payable in 2019. The following graph shows the City’s change in tax capacities over the past 10 years: $– $3,000,000 $6,000,000 $9,000,000 $12,000,000 $15,000,000 $18,000,000 $21,000,000 $24,000,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Local Tax Capacity The following table presents the average tax rates applied to city residents for each of the last three levy years: 2017 2018 2019 Average tax rate City 59.9 58.6 68.0 County 44.1 42.8 41.8 School 31.6 32.0 29.9 Special taxing 10.2 9.0 8.9 Total 145.8 142.4 148.6 Rates Expressed as a Percentage of Net Tax Capacity City of New Hope The City’s portion of the tax rate has increased in the current year, mainly due to new debt levies related to the bonds issued by the City to finance its police station/City Hall facility and community pool improvement projects. -7- 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, 2019, presented both by fund balance classification and by fund. The fund balances presented in the table below as of December 31, 2018 have been restated for the effect of a prior period adjustment made by the City in 2019 that reduced beginning fund balances by $1,775,342. 2019 2018 (Restated)Change Fund balances of governmental funds Total by classification Nonspendable 22,980$ 18,763$ 4,217$ Restricted 13,304,922 22,590,743 (9,285,821) Committed 5,033,555 5,695,475 (661,920) Assigned 6,248,128 5,695,269 552,859 Unassigned 4,641,403 3,713,980 927,423 Total governmental funds 29,250,988$ 37,714,230$ (8,463,242)$ Total by fund General 7,139,703$ 7,180,951$ (41,248)$ Economic Development Authority Special Revenue 4,721,758 5,390,021 (668,263) HRA Construction Capital Projects 4,655,140 3,177,772 1,477,368 City Hall CIP Capital Projects 1,794,294 9,527,103 (7,732,809) Street Infrastructure Capital Projects 15,854 (948,474) 964,328 Park/Pool Improvement Capital Projects 5,316,815 9,492,781 (4,175,966) HRA Bonds Debt Service (2,244,096) (2,286,122) 42,026 Nonmajor funds 7,851,520 6,180,198 1,671,322 Total governmental funds 29,250,988$ 37,714,230$ (8,463,242)$ as of December 31, Governmental Funds Change in Fund Balance Fund Balance In total, the fund balances of the City’s governmental funds decreased by $8,463,242 during the year ended December 31, 2019. The decrease was primarily in restricted fund balances, which reflects the spend down of bond proceeds in the City Hall CIP Capital Projects Fund for completion of the new police station/City Hall facility, and in the Park/Pool Improvement Capital Projects Fund for the start of construction of a new pool at the previous City Hall location. -8- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year -to-year, due to the effect of inflation and changes in its operation. Also, certain data on these tables may be classified differently than how they appear in the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report usi ng per capita data in order to better identify unique or unusual trends and activities of the City. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the MD&A. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Year 2017 2018 2019 Population 10,000–20,000 20,000–100,000 21,545 21,790 21,790 Property taxes 472$ 493$ 555$ 592$ 699$ Tax increments 27 43 39 51 60 Franchise and other taxes 48 50 42 43 44 Special assessments 40 57 4 13 9 Licenses and permits 35 47 30 17 15 Intergovernmental revenues 271 157 86 101 181 Charges for services 102 112 80 64 63 Other 78 49 39 42 72 Total revenue 1,073$ 1,008$ 875$ 923$ 1,143$ Governmental Funds Revenue per Capita With State-Wide Averages by Population Class City of New HopeState-Wide December 31, 2018 In total, the City’s governmental fund revenues for 2019 were $24,907,410, an increase of $4,775,609 (23.7 percent) from the prior year, or $220 more per capita than the prior year. Property tax revenue was $107 per capita higher than last year, due to an increase in the City’s levy. Revenue from tax increments was $9 per capita higher than last year, as it was the second year the City collected tax increments from its new Centra Homes and Industrial Equities TIF Districts. Revenue from intergovernmental revenue was $80 per capita higher than last year, due to utilizing about $1.9 million of a $2.0 million grant for construction of the new outdoor pool. Revenue from “other” sources, as presented above, were $30 per capita higher than the prior year, mainly due to improved investment revenue. -9- The expenditures of governmental funds will also vary from state -wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor . Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Year 2017 2018 2019 Population 10,000–20,000 20,000–100,000 21,545 21,790 21,790 Current 121$ 104$ 122$ 82$ 87$ 272 294 359 367 387 125 106 78 79 82 115 104 96 93 93 74 78 81 37 24 707 686 736 658 673 Capital outlay and construction 351 307 242 595 1,036 Debt service 153 109 24 37 44 39 29 33 42 63 192 138 57 79 107 Total expenditures 1,250$ 1,131$ 1,035$ 1,332$ 1,816$ Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of New Hope All other State-Wide December 31, 2018 Principal Interest and fiscal General government Public safety Public works Culture and recreation The City’s total governmental funds expenditures were $39,571,937 for 2019, an increase of $10,564,096 (36.4 percent) from the prior year, or $484 per capita. Capital outlay expenditures increased $441 per capita, due to the construction of the new police station/City Hall facility and the new pool. Debt service expenditures also increased $28 per capita, due to the debt issued in recent years to finance those improvement projects. -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 and transfers out to reflect the change in the size of the General Fund operation over the same period. 2015 2016 2017 2018 2019 Fund Balance $6,080,412 $6,273,678 $6,888,655 $7,180,951 $7,139,703 Cash Balance (Net)$5,919,870 $6,090,997 $6,750,104 $6,992,743 $7,187,781 Exp & Trans Out $11,879,622 $12,624,250 $13,290,729 $13,652,053 $14,337,748 $– $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 General Fund Financial Position Year Ended December 31, The total fund balance of the City’s General Fund decreased $41,248 in 2019, as compared to a breakeven budget. Unassigned fund balance was $7,116,723 at the end of 2019 fiscal year, which represents approximately 49.6 percent of annual expenditures and transfers out based on 2019 levels. As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels as the volume of financial activity has grown. This is an important factor because a government, like any organization, requires a certain amount of equity to operate. 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 is a factor in determining the City’s bond rating and resulting interest costs. A trend that is typical to Minnesota local governments, especially the General Fund of cities, is the unusual cash flow experienced throughout the year. The City’s General Fund cash disbursements are made fairly evenly during the year other than the impact of seasonal services, such as snowplowing, street maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Property taxes comprise about 74 percent of the fund’s total annual revenue. Approximately half of these revenues are received by the City in June/July and the rest in November/December . Consequently, the City needs to have adequate cash reserves to finance its everyday operations between these payments. -11- The following graph reflects the City’s General Fund revenue sources for 2019 compared to budget: $– $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 Property Taxes Franchise Taxes Licenses and Permits Intergovernmental Charges for Services Fines Other Millions General Fund Revenue Budget to Actual Budget Actual Total General Fund revenue for 2019 was $13,964,225, which was $72,388 (0.5 percent) higher than the final budget. Franchise taxes were $60,856 higher than budget, due mainly to the City’s allocation of these revenues between various funds. Intergovernmental revenue exceeded budget by $89,471, due to a number of small state and local grants. Other revenues were $111,393 over budget, mainly in investment earnings, due to better market performance. 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. Property Taxes Intergovernmental Other 2015 $8,308,447 $1,133,965 $2,472,328 2016 $8,954,626 $1,170,180 $2,457,510 2017 $9,541,667 $1,177,400 $2,867,879 2018 $9,971,064 $1,332,638 $2,315,213 2019 $10,297,018 $1,342,543 $2,324,664 $– $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 General Fund Revenue by Source Year Ended December 31, Total General Fund revenue for 2019 was $345,310 (2.5 percent) higher than the prior year. The majority of the increase was in property tax revenue, which increased $325,954 from last year, due to an increase in the adopted levy. -12- The following graph illustrates the components of General Fund spending for 2019 compared to budget: $– $1 $2 $3 $4 $5 $6 $7 $8 $9 General Government Public Safety Public Works Culture and Recreation Millions General Fund Expenditures Budget to Actual Budget Actual Total General Fund expenditures for 2019 were $13,983,748, which was $240,364 (1.7 percent) under budget, with the variance spread across all categories shown above. Public safety expenditures were $144,951 under budget, primarily in police personal services. Culture and recreation expenditures were $76,332 under budget, mainly in parks department personnel and other service costs. The following graph illustrates the City’s General Fund expenditures by function over the last five years: General Government Public Safety Public Works Culture and Recreation 2015 $1,686,151 $6,975,382 $1,112,092 $1,855,997 2016 $1,750,414 $7,301,852 $1,389,553 $1,932,431 2017 $1,767,879 $7,868,754 $1,435,256 $2,068,840 2018 $1,788,108 $8,107,759 $1,491,045 $2,015,141 2019 $1,904,447 $8,482,568 $1,564,148 $2,032,585 $– $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 General Fund Expenditures by Function Year Ended December 31, Total General Fund expenditures were $581,695 (4.3 percent) higher than the previous year. Public safety expenditures increased $374,809, mainly in police department costs. General government expenditures were $116,339 higher than the prior year, mainly in personnel costs for planning and zoning. -13- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds , which includes the Sewer Utility, Water Utility, Golf Course, Ice Arena, Storm Water, and Street Lighting funds. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2019, presented both by classification and by fund: 2019 2018 Change Net position of enterprise funds Total by classification Net investment in capital assets 19,315,353$ 18,783,898$ 531,455$ Restricted 1,358,401 1,160,680 197,721 Unrestricted 3,511,168 2,386,606 1,124,562 Total enterprise funds 24,184,922$ 22,331,184$ 1,853,738$ Total by fund Sewer Utility 4,395,720$ 3,908,698$ 487,022$ Water Utility 7,456,222 6,575,624 880,598 Golf Course 525,574 563,433 (37,859) Ice Arena 3,669,781 3,471,669 198,112 Storm Water 7,726,231 7,442,703 283,528 Street Lighting 411,394 369,057 42,337 Total enterprise funds 24,184,922$ 22,331,184$ 1,853,738$ 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 $1,853,738 during the year ended December 31, 2019. The net investment in enterprise capital assets increased $531,455. The $1,358,401 of restricted net position represents cash held in an escrow account in the Ice Arena Fund for the future payment of the City’s energy conservation lease revenue bonds. Unrestricted net position increased by $1,124,562, mainly due to positive operating results in the Sewer Utility, Water Utility, and Storm Water Funds. -14- SEWER UTILITY FUND The following graph presents five years of operating results for the City’s Sewer Utility Fund: 2015 2016 2017 2018 2019 Op. Rev.$2,468,638 $2,627,875 $2,899,257 $3,154,709 $3,380,075 Op. Exp.$2,447,426 $2,175,482 $2,420,994 $2,684,030 $2,843,056 Op. Inc. (Loss)$21,212 $452,393 $478,263 $470,679 $537,019 $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 Sewer Utility Operating Results Year Ended December 31, The Sewer Utility Fund ended 2019 with a total net position of $4,395,720, of which $3,515,667 represents the net investment in sewer collection system capital assets, leaving an unrestricted balance of $880,053. Net position increased $487,022 in the current year. Operating revenue in the Sewer Utility Fund for 2019 increased $225,366 (7.1 percent) from the previous year, which primarily reflects a 7.5 percent rate increase implemented for the year. Operating costs for 2019 were $159,026 (5.9 percent) more than last year, mainly due to an increase of about $76,000 in disposal charges paid to Metropolitan Council Environmental Services, and higher maintenance costs. -15- WATER UTILITY FUND The following graph presents five years of operating results for the City’s Water Utility Fund: 2015 2016 2017 2018 2019 Op. Rev.$3,576,643 $3,835,031 $3,994,122 $4,391,025 $4,387,321 Op. Exp.$4,522,667 $3,519,233 $3,462,858 $4,029,601 $3,720,072 Op. Inc. (Loss)$(946,024)$315,798 $531,264 $361,424 $667,249 $(1,000,000) $(500,000) $– $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 Water Utility Operating Results Year Ended December 31, The Water Utility Fund ended 2019 with a total net position of $7,456,222, of which $5,179,047 represents the net investment in water distribution system capital assets, leaving an unrestricted balance of $2,277,175. Water Utility Fund net position increased $880,598 in 2019. Operating revenue in the Water Utility Fund for 2019 decreased $3,704 (0.1 percent) from the prior year, as a 5.0 percent rate increase implemented for 2019 was offset by a decrease in consumption. Operating costs for 2019 were $309,529 (7.7 percent) less than the prior year, mainly due to a decrease in maintenance costs and allocated central garage charges. -16- GOLF COURSE FUND The following graph presents five years of operating results for the City’s Golf Course Fund: 2015 2016 2017 2018 2019 Op. Rev.$272,314 $299,856 $273,247 $274,735 $282,323 Op. Exp.$290,507 $338,940 $335,983 $309,757 $327,422 Op. Inc. (Loss)$(18,193)$(39,084)$(62,736)$(35,022)$(45,099) $(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 ended 2019 with a total net position of $525,574, a decrease of $37,859. Of this, $486,183 represents the net investment in golf course capital assets, leaving $39,391 in unrestricted net position. Golf Course Fund operating revenue for 2019 increased $7,588 (2.8 percent) from the prior year. Operating expenses were $17,665 (5.7 percent) higher than the prior year, primarily in personnel services (seasonal wages and pension expense) and allocated information technology charges. -17- ICE ARENA FUND The following graph presents five years of operating results for the City’s Ice Arena Fund: 2015 2016 2017 2018 2019 Op. Rev.$748,886 $713,649 $811,661 $825,531 $852,765 Op. Exp.$821,786 $890,144 $951,444 $942,466 $953,352 Op. Inc. (Loss)$(72,900)$(176,495)$(139,783)$(116,935)$(100,587) $(200,000) $(100,000) $– $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 Ice Arena Fund Year Ended December 31, The Ice Arena Fund ended 2019 with a total net position of $3,669,781, an increase of $198,112. Of this, $2,620,582 represents the net investment in ice arena capital assets, and $1,358,401 is restricted for debt service, leaving an unrestricted deficit balance of $309,202. Ice Arena Fund operating revenue for 2019 increased $27,234 (3.3 percent) from the prior year. Operating expenses were $10,886 (1.2 percent) higher than the prior year, as increases in personnel costs were partially offset by decreases in depreciation and utility expenses. -18- STORM WATER FUND The following graph presents five years of operating results for the City’s Storm Water Fund: 2015 2016 2017 2018 2019 Op. Rev.$981,723 $1,037,429 $1,082,348 $1,139,007 $1,190,058 Op. Exp.$690,536 $797,604 $834,963 $738,307 $874,407 Op. Inc. (Loss)$291,187 $239,825 $247,385 $400,700 $315,651 $– $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 $1,200,000 Storm Water Fund Year Ended December 31, The Storm Water Fund ended 2019 with a total net position of $7,726,231, an increase of $283,528. Of this, $7,124,169 represents the net investment in storm water collection system capital assets, leaving an unrestricted net position of $602,062. Storm Water Fund operating revenues for 2019 increased $51,051 (4.5 percent) from the previous year, mainly due to a 5.0 percent rate increase implemented in 2019. Operating expenses were $136,100 (18.4 percent) higher than last year, mainly due to increases in personnel service costs and depreciation expenses. -19- STREET LIGHTING FUND The following graph presents five years of operating results for the City’s Street Lighting Fund: 2015 2016 2017 2018 2019 Op. Rev.$128,890 $137,525 $137,491 $144,582 $152,975 Op. Exp.$105,471 $102,912 $101,625 $119,198 $116,612 Op. Inc. (Loss)$23,419 $34,613 $35,866 $25,384 $36,363 $– $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 Street Lighting Fund Year Ended December 31, The Street Lighting Fund ended 2019 with a total net position of $411,394, an increase of $42,337. Of this, $389,705 represents the net investment in street lighting capital assets, leaving an unrestricted net position of $21,689. Street Lighting Fund operating revenue for 2019 increased $8,393 (5.8 percent) from the previous year, which reflects a 5.0 percent rate increase implemented this year. Operating expenses were $2,586 (2.2 percent) lower than the previous year. 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, net position is divided into three components: net investment in capital assets, restricted, and unrestricted. The following table presents the components of the City’s net position as of December 31, 2019 and 2018 for governmental activities and business-type activities. The net position presented in the table below as of December 31, 2018 has been restated for the effect of a prior period adjustment made by the City in 2019 that reduced beginning net position by $1,775,342. 2019 2018 (Restated)Change Net position Governmental activities Net investment in capital assets 30,139,510$ 27,888,417$ 2,251,093$ Restricted 6,628,138 3,944,766 2,683,372 Unrestricted 16,702,142 14,664,992 2,037,150 Total governmental activities 53,469,790 46,498,175 6,971,615 Business-type activities Net investment in capital assets 19,315,353 18,783,898 531,455 Restricted 1,358,401 1,160,680 197,721 Unrestricted 3,054,187 1,783,306 1,270,881 Total business-type activities 23,727,941 21,727,884 2,000,057 Total net position 77,197,731$ 68,226,059$ 8,971,672$ As of December 31, The City’s total net position at December 31, 2019 increased $8,971,672 from the previous year-end. Governmental activities net position increased by $6,971,615 overall. The increase in net investment in capital assets is mainly due to construction of the new police station/City Hall facility and the new pool, a portion of which was financed with a grant. The increase in restricted net position was mainly due to resources transferred into the HRA Construction Capital Projects Fund restricted for economic development, and an increase in resources restricted for future debt service. A number of factors contributed to the increase in unrestricted net position, including: the elimination of the fund balance deficit in the Street Infrastructure Capital Projects Fund; reductions in the City’s net Public Employee Retirement Association pension plan liability and deferrals; and improvement in the net position of the Central Garage Internal Service Fund. Business-type activities net position increased $2,000,057, as outlined in the discussion of enterprise fund operations earlier in this report. -21- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in net position of the City for the years ended December 31, 2019 and 2018: 2018 Program Expenses Revenues Net Change Net Change Governmental activities General government 1,850,242$ 355,361$ (1,494,881)$ (1,608,502)$ Public safety 8,540,198 1,292,530 (7,247,668) (6,233,275) Public works 3,816,417 1,248,506 (2,567,911) (2,277,617) Culture and recreation 2,145,988 2,609,916 463,928 (1,651,848) Economic development 749,651 – (749,651) (1,083,358) Interest on long-term debt 1,412,763 – (1,412,763) (1,074,469) Business-type activities Sewer utility 2,834,973 3,380,479 545,506 524,546 Water utility 3,762,099 4,698,951 936,852 974,041 Golf course 319,871 296,635 (23,236) (209) Ice arena 1,003,048 894,129 (108,919) (102,889) Storm water 888,156 1,207,847 319,691 405,833 Street lighting 116,732 152,975 36,243 25,332 Total net (expense) revenue 27,440,138$ 16,137,329$ (11,302,809) (12,102,415) General revenues Property taxes and tax increments 16,583,231 14,054,673 Franchise taxes 957,448 945,244 Unrestricted grants and contributions 803,035 697,895 Unrestricted investment earnings 1,561,604 871,088 Gain on sale of capital assets 369,163 70,400 Total general revenues 20,274,481 16,639,300 Change in net position 8,971,672$ 4,536,885$ 2019 Net (expense) revenue 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. 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. The difference in the net change in public safety from year-to-year was mainly due to an increased allocation of Police and Fire pension expense. The difference in net change in culture and recreation was primarily due to the capital grant received for the pool improvement project. -22- LEGISLATIVE UPDATES The 2019 legislative session began with a projected state general fund surplus of $1.052 billion. The legislative agenda was primarily focused on setting an operating budget for the state’s fiscal 2020-2021 biennium. At the end of the regular session, only a higher education budget bill had been completed. However, after a special session, the Legislature was able to address the 11 remaining budget bills, as well as pass an omnibus tax bill and small pension bill. The following is a brief summary of specific legislative changes from the 2019 session or previous legislative sessions potentially impacting Minnesota cities. Local Government Aid (LGA) – An additional $26 million was added to the appropriation for the city LGA formula beginning in fiscal 2020, bringing the total state-wide appropriation to $560.4 million. An additional $4 million was added to the appropriation beginning in fiscal 2021. The LGA distribution formula for 2020 was altered to provide that a city’s 2020 LGA may not be less than its 2019 aid, and the cap on maximum aid losses in any year thereafter was modified. Bonding Bill – The 2019 bonding bill provided financing for approximately $102 million of projects and funding authorized by the 2018 omnibus bonding bill, which had been legally challenged due to their reliance on the use of the Environment and Natural Resources Trust Fund to generate appropriation bonds. The 2019 Legislature changed the funding source for these projects to general obligation bonds, clearing the way for the projects to go forward. Included in this was $59 million earmarked for city water and wastewater projects through the state Public Facilities Authority. Local Option Sales Tax Process – Effective May 1, 2019, the process for cities to enact a local option sales tax have been modified, requiring special legislation prior to a local referendum vote. Cities must now adopt a resolution specifying the proposed sales tax rate and time frame for the sales tax. The resolution must also include a detailed description of the project or projects (up to five) to be funded by the sales tax, the amount to be raised for each project, and documentation of the region al significance of each project. The resolution must be submitted to the House and Senate tax committee chairs by January 31st to be considered for special legislation by the State Legislature. If special legislation is approved, voter approval must be obtained by referendum at a general election within two years of legislative approval. Wage Theft – The Legislature enacted a number of changes in employment law aimed at reducing wage theft by employers. The changes require employers to provide written notice to new employees of specific wage information including rate of pay, allowances, paid leave, deductions, days in a pay period, and the employer’s legal name, address, and phone number. Employers must also provide an earnings statement that includes similar information. The changes also create new requirements for employer recordkeeping for hours worked each day and each workweek, and imposes penalties for failure to do so and for refusal to make the records available for inspection by the Department of Labor. Written Estimates of Consulting Fees – Effective August 1, 2019, upon request by applicants for a permit, license, or other approval relating to real estate development or construction, cities are required to provide a written, nonbinding estimate of consulting fees to be charged to the applicant based on information available at that time. The related application will not be considered complete until the city has provided the estimate, received the required application fees, and received the applicant’s signed acceptance of the fee estimate along with a signed statement that the applicant has not relied on the fee estimate in its decision to proceed with the application. Contract Retainage – Effective for contracts entered into August 1, 2019 or later, contract retainage must be released no later than 60 days after the related construction project reaches substantial completion as defined by statute. After substantial completion, cities can still withhold amounts equal to, 1) 250 percent of the cost to correct or complete work known at the time of substantial completion, and 2) the greater of $500 or 1 percent of the value of the contract pending the completion of “final paperwork,” including documents required to fulfill contractual obligations such as operating manuals, payroll documents for projects subject to prevailing wage requirements, and contractor payroll tax withholding affidavits. Any resulting reduction in retainage must be passed from the contractor to all subcontractors at the same rate. -23- Driver and Vehicle Registration System (VTRS) – The Legislature selected VTRS, a third party vendor system, to replace the failed Minnesota Licensing and Registration System (MNLARS). Fees from driver’s licenses, license plates, and filing fees were increased and a technology surcharge imposed on vehicle registration renewals to pay for the implementation of VTRS, the decommissioning of MNLARS, and to temporarily increase the capacity of Driver and Vehicle Services to meet public service needs. Included in this is $13 million appropriated in 2019 for reimbursement grants to deputy registrars for costs related to MNLARS. The grants, which would be determined by formula, would require the deputy registrar accepting the grant to release the state from any further liability or claims related to MNLARS. Vaping Ordinance Authority – Effective July 1, 2019, cities are allowed to enact and enforce ordinances with more stringent measures than the Minnesota Clean Indoor Air Act to protect individua ls from involuntary exposure to aerosol or vapor from electronic delivery devices. Water Connection Fees – Effective January 1, 2020, the annual water connection fees cities are required to collect on behalf of the Minnesota Department of Health for water testing and support has been increased from $6.36 to $9.72. Military Exception to Open Meeting Law – Effective August 1, 2019, members of a public body that are in the military will be allowed to participate in public meetings via interactive television when they are at a required drill, deployed, or on active duty. The member may participate under this exception up to three times a year. Pension Plan Changes – The 2019 pension bill included several changes to the various pension plans throughout the state: • Changes to plans administered by the Public Employees Retirement Association (PERA) included: o The rights of PERA General Employees Retirement Fund (GERF) plan and Public Employees Police and Fire Fund (PEPFF) plan members to purchase service credit for periods of military leave were expanded. This gives plan members the right to purchase up to five years of service credit for military service leave t hat is not federally protected because the service occurred prior to public employment or the member did not meet the payment deadlines applicable to federally protected leave service credit purchases. o The Phased Retirement Option (PRO) program, which gives cities an opportunity to retain potentially retiring employees that are GERF plan members aged 62 or over, was altered and made permanent. Under a PRO arrangement, an employee would begin collecting a retirement annuity, but could continue working for their current employer for up to five years if they agree to a work schedule that represents a reduction of at least 25 percent each pay period from their current schedule, up to a maximum of 1,044 hours per year. Employees would not be allowed to contribute to a pension benefit plan or accrue additional service time while working under a PRO. o A process was established for municipalities and joint powers entities to terminate participation in the PERA Statewide Volunteer Firefighter (SVF) plan if, 1) the entity has either eliminated its fire department or ceased using the services of all departing firefighters and any other noncareer or volunteer firefighters, and 2) the entity’s account has assets sufficient to cover all liabilities including the fully vested liabilities for all departing firefighters and administrative expenses. -24- • Changes impacting volunteer firefighter relief associations (VRFAs) included: o Effective January 1, 2020, vesting schedules for defined contribution plans cannot require that a member have more than 20 years of active service to become 100 percent vested in the member’s account, or provide for a larger vesting percentage with respect to the completed years of service than as provided in the statutory schedule. o Effective January 1, 2020, the permitted graded vesting schedule for defined benefit pension plans is reduced from 20 years to 10 years for full vesting. Also, plans cannot require that a member have more than 20 years of active service to become 100 percent vested in the member’s accrued service pension, or provide for a larger vesting percentage with respect to the completed years of service than as provided in the statutory schedule. o Effective January 1, 2020, supplemental benefits are allowed to be paid to designated beneficiaries or estates when plan members have no surviving spouse or children. THIS PAGE INTENTIONALLY LEFT BLANK -25- ACCOUNTING AND AUDITING UPDATES The following is a summary of GASB standards expected to be implemented in the next few years. However, due to the COVID-19 outbreak, the GASB is currently considering a proposal to delay the original implementation dates of these and other standards by a year. At this point, the implementat ion dates for the standards listed below are tentative and may be subject to change. 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 exclud ed 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 probability 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. GASB STATEMENT NO. 91, CONDUIT DEBT OBLIGATIONS The primary objectives of this statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures. -26- A conduit debt obligation is defined as a debt instrument having all of the following characteristics: • There are at least three parties involved: (1) an issuer, (2) a third party obligor, and (3) a debt holder or a debt trustee. • The issuer and the third party obligor are not within the same financial reporting entity. • The debt obligation is not a parity bond of the issuer, nor is it cross-collateralized with other debt of the issuer. • The third party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance. • The third party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments). This statement also addresses arrangements, often characterized as leases, that are associated with conduit debt obligations. In those arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by third party obligors in the course of their activities. This statement requires issuers to disclose general information about their conduit debt obligations, organized by type of commitment, including the aggregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each type of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period. The requirements of this statement are effective for reporting periods beginning after December 15, 2020. Earlier application is encouraged.