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2022 New Hope Management Report Management Report for City of New Hope, Minnesota December 31, 2022 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, 2022. We have organized this report into the following sections: •Audit Summary •Governmental Funds Overview •Enterprise Funds Overview •Government-Wide Financial Statements •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 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 June 13, 2023 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, 2022. 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, 2022: • We 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. 87, Leases, during the year. 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 no findings based on our testing of the City’s compliance with Minnesota laws and regulations. OTHER OBSERVATIONS AND RECOMMENDATIONS Deposit Sweep Account Minnesota Statutes § 118A.03 requires banks holding local government entity deposits to protect the deposits from custodial credit risk (the risk of loss in the event of a bank failure) by providing adequate insurance, bond, or pledged collateral to cover amounts “on deposit at the close of the financial institution’s banking day.” Some banks utilize arrangements under which governmental entities’ deposit balances in excess of Federal Deposit Insurance Corporation limits are swept out of their depository accounts daily into other investments or to depository accounts at other banks. -2- An issue has arisen with some sweep account arrangements, caused by a lag between the timing of when the primary bank’s records show the funds being swept out of its account and when the receiving bank’s records acknowledge receipt of the funds. If the receiving bank’s records do not show the transferred funds arriving the same business day as the primary bank shows them being swept out, the funds in transit would legally still be considered in the custody of the primary depository at the end of the banking day. This would potentially subject any excess deposits to custodial credit risk and not complying with statutory requirements. The Minnesota Office of the State Auditor (OSA) has added audit requirements to test such sweep arrangements in their Legal Compliance Audit Guide. In addition, recent bank failures have placed additional emphasis on the importance of protecting local government deposits from custodial credit risk. We recommend the City review the terms of any sweep arrangement it has in place or is considering and verify that the financial institutions on both sides of the sweep transaction are recognizing the transfer of funds the same banking day. Credit Card Transactions Minnesota cities have the authority to make purchases using credit cards issued on behalf of their city. Credit card purchases are becoming more commonplace, especially with the proliferation of e-commerce, and have consequently been garnering increased scrutiny from oversight agencies. The statutes authorizing credit card use by cities restrict their use to purchases made on behalf of a city, do not permit personal use of the credit card by the card user, and specify they should only be used by employees authorized to make purchases. Employees are personally liable for unauthorized credit card purchases. Purchases made with credit cards must comply with other applicable state laws, including the requirement that all claims presented for payment must be in writing and itemized. In its Statement of Position (SOP) on credit card use, the OSA has clarified that the statement from the credit card company lacks sufficient detail to comply with this requirement and, therefore, “public entities using credit cards must retain the invoices and receipts needed to support the items charged in the bill from the credit card company.” The SOP also states that the individual vendors providing the goods or services should be listed on the claims list provided to a city council for review and approval, rather than the credit card company. While the authorized use of a credit card to make small purchases offers advantages, such as convenience and expedited purchasing, the ability of the credit card users to make a city liable for purchases that are improper or not in compliance with statutory requirements is an added risk related to such transactions. The OSA recommends that a robust credit card policy be established by public entities allowing credit card purchases, which clearly delineates the requirements for use, supporting documentation requ ired, and the review and approval process for credit card purchases. The OSA also recommends that cities obtain signed written acknowledgement of the policy from all authorized card users. 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, 2022. However, the City implemented the following governmental accounting standard during the fiscal year: • The City implemented GASB Statement No. 87, Leases, during the current fiscal year. This standard changed the way lease transactions are reported by the City, but did not result in a restatement of beginning net position or fund balances. 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. -3- 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: • Depreciation/Amortization – Management’s estimates of depreciation/amortization expenses 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. • Value of Land Held for Resale – These assets are stated at the lower of cost or acquisition value based on management’s estimates. • OPEB and Pension Benefits – The City has recorded liabilities and activity for other post-employment benefits (OPEB) and pension benefits. Actuarial estimates of these obligations are calculated using actuarial methodologies described in GASB Statement Nos. 68 and 75. The 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 to develop these accounting estimates 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. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are 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. 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. -4- MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated June 13, 2023. MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. OTHER AUDIT FINDINGS OR ISSUES We generally discuss a variety of matters, including the application of accounting principles and auditing standards with management each year prior to retention as the City’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. OTHER 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, which accompany the financial statements, but 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 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 supplementary 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 2021 fiscal year, local ad valorem property tax levies provided 44.0 percent of the total governmental fund revenues for cities over 2,500 in population, and 35.5 percent for cities under 2,500 in population. Total property taxes levied by all Minnesota cities for taxes payable in 2022 increased 5.9 percent compared to the prior year, and 4.2 percent for taxes payable in 2023. The total tax capacity value of property in Minnesota cities increased about 5.6 percent for the 2022 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 202 2 were based on assessed market values as of January 1, 2021), 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 7.7 percent for taxes payable in 2021 and 6.0 percent for taxes payable in 2022. 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 $2,400,000,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 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 8.1 percent for taxes payable in 2021 and 5.1 percent for taxes payable in 2022. 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 $30,000,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Local Tax Capacity The following table presents the average tax rates applied to city residents for each of the last three levy years: 2020 2021 2022 Average tax rate City 66.1 64.0 64.3 County 41.1 38.2 38.6 School 26.4 25.5 26.5 Special taxing 8.4 8.6 8.7 Total 142.0 136.3 138.1 Rates Expressed as a Percentage of Net Tax Capacity City of New Hope Both the City portion of the tax rate and the overall tax rate for New Hope residents increased slightly for the 2022 levy year. -7- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2022, presented both by fund balance classification and by major fund. 2022 2021 Change Fund balances of governmental funds Total by classification Nonspendable 12,957$ 49,680$ (36,723)$ Restricted 10,602,043 9,779,064 822,979 Committed 4,724,303 4,520,972 203,331 Assigned 10,314,362 9,059,040 1,255,322 Unassigned 5,750,212 6,646,030 (895,818) Total governmental funds 31,403,877$ 30,054,786$ 1,349,091$ Total by fund General 7,748,072$ 8,673,743$ (925,671)$ Economic Development Authority Special Revenue 4,333,830 4,212,479 121,351 HRA Construction Capital Projects 6,628,845 5,955,136 673,709 Street Infrastructure Capital Projects 1,370,801 1,156,367 214,434 Park Infrastructure Capital Projects 1,604,089 1,512,440 91,649 HRA Bonds Debt Service (1,905,269) (1,978,033) 72,764 Nonmajor funds 11,623,509 10,522,654 1,100,855 Total governmental funds 31,403,877$ 30,054,786$ 1,349,091$ as of December 31, Governmental Funds Change in Fund Balance Fund Balance In total, the fund balances of the City’s governmental funds increased by $1,349,091 during the year ended December 31, 2022. The increase in restricted fund balances is primarily attributable to the improvement in the financial position of the City’s HRA Construction Capital Projects Fund in 2022. Resources accumulated for the second phase of the City’s public works facility addition in the (nonmajor) Public Works Facility CIP Capital Projects Fund contributed to the increase in assigned fund balances. The decrease in unassigned fund balance relates primarily to the General Fund, which included unbudgeted transfers of $1,142,382 of excess fund balance accumulated in the previous year to other funds, the majority of which went to the (nonmajor) Public Works Facility CIP Capital Projects Fund. -8- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the OSA to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year-to-year, due to the effect of inflation and changes in its operation. Also, certain data in these tables may be classified differently than how they appear in the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of the City. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the MD&A. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Year 2020 2021 2022 Population 10,000–20,000 20,000–100,000 21,986 21,870 21,870 Property taxes 529$ 557$ 762$ 798$ 834$ Tax increments 36 49 87 97 101 Franchise and other taxes 66 53 44 44 44 Special assessments 41 56 11 7 6 Licenses and permits 46 53 18 18 16 Intergovernmental revenues 293 202 195 149 164 Charges for services 111 110 45 81 103 Other 39 26 35 19 (13) Total revenue 1,161$ 1,106$ 1,197$ 1,213$ 1,255$ Governmental Funds Revenue per Capita With State-Wide Averages by Population Class City of New HopeState-Wide December 31, 2021 In total, the City’s governmental fund revenues for 2022 were $27,459,463, an increase of $947,001 (3.6 percent) or $42 capita from the prior year. Property tax revenue was $36 per capita higher than last year, due to an increase in the City’s levy. Intergovernmental revenue was $15 per capita higher than last year, mainly due to an increase in municipal state aid (MSA) street aid. Increases in police service charges and recreation program fees contributed to a $22 per capita increase in charges for services. Revenue from “other” sources as presented above, were $32 per capita lower than the prior year, mainly due to a decrease in investment earnings (charges) related to fair value declines in the City’s investment portfolio. As the City generally holds its investments to maturity, these unrealized fair value fluctuations are expected to be recovered by the time the individual investments mature. -9- The expenditures of governmental funds will also vary from state -wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with comparative state-wide averages, are presented in the following table: Year 2020 2021 2022 Population 10,000–20,000 20,000–100,000 21,986 21,870 21,870 Current 131$ 116$ 94$ 98$ 111$ 296 327 380 393 408 124 112 84 87 100 124 107 93 120 138 79 77 59 61 59 Total current 754 739 710 759 816 Capital outlay and construction 407 317 394 211 164 Debt service 161 110 87 117 121 41 34 81 79 74 Total debt service 202 144 168 196 195 Total expenditures 1,363$ 1,200$ 1,272$ 1,166$ 1,175$ Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of New Hope All other State-Wide December 31, 2021 Principal Interest and fiscal General government Public safety Public works Culture and recreation The City’s total governmental funds expenditures were $25,687,141 for 2022, an increase of $203,246 (0.8 percent) from the prior year, or $9 per capita. Current expenditures increased $57 per capita, with the increase spread across almost all functional areas. Capital outlay expenditures decreased $47 per capita, mainly due to less construction on the City’s public works facility addition than in the previous year. Debt service expenditures decreased $1 per capita. -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, culture and recreation, and economic development. 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 operating transfers out to reflect the change in the size of the General Fund operation over the same period. 2018 2019 2020 2021 2022 Fund Balance $7,180,951 $7,139,703 $8,926,086 $8,673,743 $7,748,072 Cash Balance (Net)$6,992,743 $7,187,781 $8,819,883 $8,578,067 $7,629,448 Exp & Trans Out $13,652,053 $14,337,748 $14,130,989 $16,845,891 $17,475,784 $– $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 Financial Position Year Ended December 31, The total fund balance of the City’s General Fund decreased $925,671 in 2022, as compared to a breakeven budget. Unassigned fund balance was $7,655,481 at the end of fiscal year 2022, which represents approximately 43.8 percent of annual expenditures and transfers out based on 2022 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 72.4 percent of the fund’s total annual revenue. Approximately half of these revenues are received by the City in July and the rest in 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 2022 compared to budget: $(1)$– $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 Property Taxes Franchise Taxes Licenses and Permits Intergovernmental Charges for Services Fines and Forfeitures Other Millions General Fund Revenue Budget to Actual Budget Actual Total General Fund revenue for 2022 was $15,735,928, which was $141,223 (0.9 percent) lower than the final budget. Intergovernmental revenue was $105,199 over budget, mainly in MSA street maintenance and construction aid. Revenue from other sources, as shown above, was $283,928 under budget, which was attributable to the fair value decline recognized on the City’s investment portfolio, as previously discussed. The following graph presents the City’s General Fund revenue by source for the last five years. The graph reflects the City’s reliance on property taxes, which represented 72.4 percent of General Fund revenue in 2022. Property Taxes Intergovernmental Other 2018 $9,971,064 $1,332,638 $2,315,213 2019 $10,297,018 $1,342,543 $2,324,664 2020 $10,422,823 $3,161,645 $1,993,616 2021 $10,914,572 $2,603,365 $2,618,139 2022 $11,391,654 $1,629,741 $2,714,533 $– $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 Revenue by Source Year Ended December 31, Total General Fund revenue for 2022 was $400,148 (2.5 percent) lower than the prior year. Property tax revenue increased $477,082, due to a levy increase. Intergovernmental revenues were $973,624 less than 2021, primarily due to less federal American Rescue Plan Act (ARPA) award revenue recognized in the General Fund in 2022. Revenue from other sources increased $96,394 from last year, mainly in charges for services. -12- The following graph illustrates the components of General Fund spending for 2022 compared to budget: $– $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 General Government Public Safety Public Works Culture and Recreation Millions General Fund Expenditures Budget to Actual Budget Actual Total General Fund expenditures for 2022 were $16,333,402, which was $154,209 (1.0 percent) over budget. Public works expenditures were $271,808 over budget, mainly due to costs associated with an Emerald Ash Borer abatement program. Public safety expenditures were $252,804 under budget, primarily in police personnel services, as several positions remained vacant during the year. 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 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 2020 $2,063,407 $8,409,878 $1,622,046 $2,035,658 2021 $2,148,125 $8,772,777 $1,653,003 $2,629,453 2022 $2,423,685 $9,023,699 $1,870,737 $3,015,281 $– $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 General Fund Expenditures by Function Year Ended December 31, Total General Fund expenditures were $1,130,044 (7.4 percent) higher than the previous year. General government expenditures increased $275,560, mainly in planning and zoning, elections, and City Hall maintenance. Public safety expenditures went up by $250,922, mainly in police salaries and contributions to the West Metro Fire Rescue District. Public works expenditures were $217,734 higher, mainly due to costs related to Emerald Ash Borer abatement. Culture and recreation expenditures were $385,828 higher than the prior year, mainly in salaries and services related to the aquatic center and recreation programs. -13- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which include the Sewer Utility, Water Utility, Golf Course, Ice Arena, Storm Water, and Street Lighting funds. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2022, presented both by classification and by fund: 2022 2021 Change Net position of enterprise funds Total by classification Net investment in capital assets 24,036,351$ 22,607,046$ 1,429,305$ Unrestricted 7,913,393 6,953,260 960,133 Total enterprise funds 31,949,744$ 29,560,306$ 2,389,438$ Total by fund Sewer Utility 6,762,627$ 5,977,582$ 785,045$ Water Utility 10,717,300 9,767,495 949,805 Golf Course 755,190 716,948 38,242 Ice Arena 4,316,750 4,087,498 229,252 Storm Water 8,908,669 8,536,338 372,331 Street Lighting 489,208 474,445 14,763 Total enterprise funds 31,949,744$ 29,560,306$ 2,389,438$ 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 $2,389,438 during the year ended December 31, 2022, with the increase spread across all funds. The net investment in enterprise capital assets increased $1,429,305, mainly due to the relationship between the repayment of outstanding capital-related debt and depreciation/amortization recognized on the related capital assets. Unrestricted net position increased by $960,133, 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: 2018 2019 2020 2021 2022 Oper Rev $3,154,709 $3,380,075 $3,712,613 $3,906,809 $4,026,715 Oper Exp $2,684,030 $2,843,056 $3,119,273 $2,868,543 $3,075,452 Oper Inc (Loss)$470,679 $537,019 $593,340 $1,038,266 $951,263 $– $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 Sewer Utility Operating Results Year Ended December 31, The Sewer Utility Fund ended 2022 with a total net position of $6,762,627, of which $4,228,034 represents the net investment in sewer collection system capital assets, leaving an unrestricted balance of $2,534,593. Net position increased $785,045 in the current year. Operating revenue in the Sewer Utility Fund for 2022 increased $119,906 (3.1 percent) from the previous year, which primarily reflects a 3.0 percent rate increase implemented for the year. Operating costs for 2022 were $206,909 (7.2 percent) less than last year, mainly in salaries and benefits expenses. -15- WATER UTILITY FUND The following graph presents five years of operating results for the City’s Water Utility Fund: 2018 2019 2020 2021 2022 Oper Rev $4,391,025 $4,387,321 $5,139,616 $5,545,731 $5,526,619 Oper Exp $4,029,601 $3,720,072 $4,178,233 $4,677,022 $4,713,624 Oper Inc (Loss)$361,424 $667,249 $961,383 $868,709 $812,995 $– $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 Water Utility Operating Results Year Ended December 31, The Water Utility Fund ended 2022 with a total net position of $10,717,300, of which $6,631,842 represents the net investment in water distribution system capital assets, leaving an unrestricted balance of $4,085,458. The Water Utility Fund net position increased $949,805 in 2022. Operating revenue in the Water Utility Fund for 2022 decreased $19,112 (0.3 percent) from the prior year, as water rates remained flat and consumption for irrigation remained high, due to another dry year. Operating costs for 2022 were also very close to the previous year, increasing by $36,602 (0.8 percent). -16- GOLF COURSE FUND The following graph presents five years of operating results for the City’s Golf Course Fund: 2018 2019 2020 2021 2022 Oper Rev $274,735 $282,323 $401,666 $450,307 $424,160 Oper Exp $309,757 $327,422 $324,994 $358,282 $389,397 Oper Inc (Loss)$(35,022)$(45,099)$76,672 $92,025 $34,763 $(100,000) $(50,000) $– $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 Golf Course Fund Year Ended December 31, The Golf Course Fund ended 2022 with a total net position of $755,190, an increase of $38,242. Of this, $394,821 represents the net investment in golf course capital assets, leaving $360,369 in unrestricted net position. Golf Course Fund operating revenue for 2022 decreased $26,147 (5.8 percent) from the prior year, which primarily reflects a 9.3 percent decrease in rounds played. Operating expenses were $31,115 (8.7 percent) higher than the prior year, mainly in personnel costs and depreciation/amortization. -17- ICE ARENA FUND The following graph presents five years of operating results for the City’s Ice Arena Fund: 2018 2019 2020 2021 2022 Oper Rev $825,531 $852,765 $560,316 $883,968 $879,927 Oper Exp $942,466 $953,352 $966,868 $1,059,816 $1,175,657 Oper Inc (Loss)$(116,935)$(100,587)$(406,552)$(175,848)$(295,730) $(500,000) $(300,000) $(100,000) $100,000 $300,000 $500,000 $700,000 $900,000 $1,100,000 $1,300,000 Ice Arena Fund Year Ended December 31, The Ice Arena Fund ended 2022 with a total net position of $4,316,750, an increase of $229,252. Of this, $5,156,510 represents the net investment in ice arena capital assets, leaving an unrestricted deficit net position of $839,760. Ice Arena Fund operating revenue for 2022 decreased $4,041 (0.5 percent) from the prior year, primarily from a decrease of about 3.8 percent in hours of ice time ice rental. Operating expenses were $115,841 (10.9 percent) higher than the prior year, with increases in personnel costs, supplies, utilities, and depreciation/amortization. -18- STORM WATER FUND The following graph presents five years of operating results for the City’s Storm Water Fund: 2018 2019 2020 2021 2022 Oper Rev $1,139,007 $1,190,058 $1,259,707 $1,321,518 $1,378,944 Oper Exp $738,307 $874,407 $886,021 $890,301 $943,889 Oper Inc (Loss)$400,700 $315,651 $373,686 $431,217 $435,055 $– $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 $1,300,000 $1,400,000 Storm Water Fund Year Ended December 31, The Storm Water Fund ended 2022 with a total net position of $8,908,669, an increase of $372,331. Of this, $7,293,895 represents the net investment in storm water collection system capital assets, leaving an unrestricted net position of $1,614,774. Storm Water Fund operating revenues for 2022 increased $57,426 (4.3 percent) from the previous year, mainly due to a 4.0 percent rate increase implemented in 2022. Operating expenses were $53,588 (6.0 percent) higher than last year, mainly in personnel costs. -19- STREET LIGHTING FUND The following graph presents five years of operating results for the City’s Street Lighting Fund: 2018 2019 2020 2021 2022 Oper Rev $144,582 $152,975 $161,866 $170,656 $178,120 Oper Exp $119,198 $116,612 $133,159 $136,112 $157,293 Oper Inc (Loss)$25,384 $36,363 $28,707 $34,544 $20,827 $– $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 Street Lighting Fund Year Ended December 31, The Street Lighting Fund ended 2022 with a total net position of $489,208, an increase of $14,763. Of this, $331,249 represents the net investment in street lighting capital assets, leaving an unrestricted net position of $157,959. Street Lighting Fund operating revenue for 2022 increased $7,464 (4.4 percent) from the previous year, which reflects a 5.0 percent rate increase implemented this year. Operating expenses were $21,181 (15.6 percent) higher than the previous year, mainly due to an increase in utilities expense. THIS PAGE INTENTIONALLY LEFT BLANK -20- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net position is divided into three components: net investment in capital assets, restricted, and unrestricted. The following table presents the components of the City’s net position as of December 31, 2022 and 2021, for governmental activities and business-type activities: 2022 2021 Change Net position Governmental activities Net investment in capital assets 37,045,401$ 34,985,781$ 2,059,620$ Restricted 9,539,926 8,598,311 941,615 Unrestricted 22,780,655 23,427,177 (646,522) Total governmental activities 69,365,982 67,011,269 2,354,713 Business-type activities Net investment in capital assets 24,036,351 22,607,046 1,429,305 Unrestricted 7,525,398 6,455,200 1,070,198 Total business-type activities 31,561,749 29,062,246 2,499,503 Total net position 100,927,731$ 96,073,515$ 4,854,216$ As of December 31, The City’s total net position at December 31, 2022 represented an increase of $4,854,216 from the previous year-end. Governmental activities net position increased by $2,354,713 overall. The increase in net investment in capital assets is mainly due to current year capital asset additions, which were purchased or constructed for without the issuance of new bonds. The increase in restricted net position was mainly due to an increase in tax increment revenues in the HRA Construction Capital Projects Fund, which are restricted for economic development. The decrease in unrestricted net position was mainly due to the unbudgeted transfers of excess fund balance from the previous year in the General Fund, as discussed earlier in this report. Business-type activities net position increased $2,499,503, as detailed in the discussion of enterprise fund operations. -21- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation/amortization of long-lived capital assets, and other accrual-based expenses. The changes in the City’s net position for the years ended December 31, 2022 and 2021 were as follows: 2021 Program Expenses Revenues Net Change Net Change Governmental activities General government 2,991,397$ 575,345$ (2,416,052)$ (419,736)$ Public safety 9,224,111 1,584,010 (7,640,101) (6,540,941) Public works 4,716,237 1,357,560 (3,358,677) (3,135,345) Culture and recreation 3,845,915 1,304,099 (2,541,816) (2,062,010) Economic development 1,374,777 – (1,374,777) (1,434,986) Interest on long-term debt 1,440,518 – (1,440,518) (1,518,351) Business-type activities Sewer utility 3,057,860 4,028,074 970,214 933,983 Water utility 4,732,554 5,914,064 1,181,510 1,099,890 Golf course 386,668 453,486 66,818 104,938 Ice arena 1,176,353 931,777 (244,576) (164,655) Storm water 958,733 1,423,573 464,840 454,991 Street lighting 157,248 178,120 20,872 34,757 Total net (expense) revenue 34,062,371$ 17,750,108$ (16,312,263) (12,647,465) General revenues Property taxes and tax increments 20,423,652 19,476,109 Franchise taxes 959,744 962,395 Unrestricted grants and contributions 905,573 3,155,397 Unrestricted investment earnings (charges)(1,131,728) 17,650 Gain on sale of capital assets 9,238 70,300 Total general revenues 21,166,479 23,681,851 Change in net position 4,854,216$ 11,034,386$ 2022 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 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. The difference in the net change in general government was mainly due changes in the allocation of internal service fund costs for technology and other services. The difference in the net change in public safety was primarily due to a decline in the funding level of the state-wide Public Employees Retirement Association Public Employees Police and Firefighter pension plan, recognized in 2022. The decrease in unrestricted grants and contributions relates to the recognition of approximately $2.3 million of ARPA funding in the prior year. The decline in unrestricted investment earnings was due to the fair value adjustments to investments previously discussed. -22- ACCOUNTING AND AUDITING UPDATES The following is a summary of Governmental Accounting Standards Board (GASB) standards expected to be implemented in the next few years. GASB STATEMENT NO. 96, SUBSCRIPTION-BASED INFORMATION TECHNOLOGY ARRANGEMENTS This statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for government end users (governments). This statement (1) defines an SBITA; (2) establishes that an SBITA results in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of an SBITA; and (4) requires note disclosures regarding an SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended. An SBITA is defined as a contract that conveys control of the right to use another party’s (an SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange -like transaction. Under this statement, a government generally should recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability. This statement provides an exception for short-term SBITAs with a maximum possible term under the SBITA contract of 12 months, including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources. This statement requires a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the subscription asset, accumulated amortization, other payments not included in the measurement of a subscription liability, principal and interest requirements for the subscription liability, and other essential information. The requirements of this statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. GASB STATEMENT NO. 99, OMNIBUS 2022 The objectives of this statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing (1) practice issues that have been identified during implementation and application of certain GASB statements and (2) accounting and financial reporting for financial guarantees. The practice issues addressed by this statement are as follows: • Classification and reporting of derivative instruments within the scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, that do not meet the definition of either an investment derivative instrument or a hedging derivative instrument. • Clarification of provisions in Statement No. 87, Leases, as amended, related to the determination of the lease term, classification of a lease as a short-term lease, recognition and measurement of a lease liability and a lease asset, and identification of lease incentives. • Clarification of provisions in Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, related to (a) the determination of the public-private and public-public partnership (PPP) term and (b) recognition and measurement of installment payments and the transfer of the underlying PPP asset. -23- • Clarification of provisions in Statement No. 96, Subscription-Based Information Technology Arrangements, related to the SBITA term, classification of an SBITA as a short-term SBITA, and recognition and measurement of a subscription liability. • Extension of the period during which the London Interbank Offered Rate (LIBOR) is considered an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap that hedges the interest rate risk of taxable debt. • Accounting for the distribution of benefits as part of the Supplemental Nutrition Assistance Program (SNAP). • Disclosures related to nonmonetary transactions. • Pledges of future revenues when resources are not received by the pledging government. • Clarification of provisions in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended, related to the focus of the government-wide financial statements. • Terminology updates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. • Terminology used in Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, to refer to resource flows statements. The requirements of this statement that are effective are as follows: • The requirements related to extension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transactions, pledges of future revenues by pledging governments, clarification of certain provisions in Statement No. 34, as amended, and terminology updates related to Statement No. 53 and Statement No. 63 are effective upon issuance. • The requirements related to leases, PPPs, and SBITAs are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. • The requirements related to financial guarantees and the classification and reporting of derivative instruments within the scope of Statement No. 53 are effective for fiscal years beginning after June 15, 2023, and all reporting periods thereafter. GASB STATEMENT NO. 100, ACCOUNTING CHANGES AND ERROR CORRECTIONS – AN AMENDMENT OF GASB STATEMENT NO. 62 The primary objective of this statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable, reliable, relevant, consistent, and comparable information for making decisions or assessing accountability. The requirements of this statement will improve the clarity of the accounting and financial reporting requirements for accounting changes and error corrections, which will result in greater consistency in application in practice. In turn, more understandable, reliable, relevant, consistent, and comparable information will be provided to financial statement users for making decisions or assessing accountability. In addition, the display and note disclosure requirements will result in more c onsistent, decision useful, understandable, and comprehensive information for users about accounting changes and error corrections. The requirements of this statement are effective for accounting changes and error corrections made in fiscal years beginning after June 15, 2023, and all reporting periods thereafter. Earlier application is encouraged. -24- GASB STATEMENT NO. 101, COMPENSATED ABSENCES The objective of this statement is to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures. This statement requires that liabilities for compensated absences be recognized for (1) leave that has not been used and (2) leave that has been used, but not yet paid in cash or settled through noncash means. A liability should be recognized for leave that has not been used if (a) the leave is attributable to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means. Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Leave that accumulates is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid or settled. This statement requires that a liability for certain types of compensated absences—including parental leave, military leave, and jury duty leave—not be recognized until the leave commences. This statement also requires that a liability for specific types of compensated absences not be recognized until the leave is used. This statement also establishes guidance for measuring a liability for leave that has not been used, generally using an employee’s pay rate as of the date of the financial statements. A liability for leave that has been used, but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary-related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities. With respect to financial statements prepared using the current financial resources measurement focus, this statement requires that expenditures be recognized for the amount that normally would be liquidated with expendable available financial resources. The requirements of this statement are effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. Earlier application is encouraged. THIS PAGE INTENTIONALLY LEFT BLANK