2011 Management ReportManagement Report
for
City of New Hope
Hennepin County, Minnesota
December 31, 2011
MMKR
CERTIFIE[ PUBLIC
ACCOIJN'I'ANTS
City Council and Management
City of New Hope, Minnesota
PRINCIPALS
Thomas M. Nionrague, C1
'Thomas A. Karnowski, CPA
Paul A. Radosevich, CPA
William J. Lauer, CPA
James H. Eichren, CPA
Aaron J. Nielsen, CPA
Victoria L. Holinka, CPA
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, 2011. The purpose of this
report is to provide comments resulting from our audit process and to communicate information relevant
to city finances in Minnesota. We have organized this report into the following sections:
• Audit Summary
• Funding Cities in Minnesota
• Governmental Funds Overview
• Financial Trends and Conditions of Selected Funds
• Accounting and Auditing Updates
We would be pleased to further discuss any of the information contained in this report or any other
concerns that you would like us to address. We would also like to express our thanks for the courtesy and
assistance extended to us during the course of our audit.
This report is intended solely for the information and use of those charged with governance of the City,
management, and those who have responsibility for oversight of the financial reporting process and is not
intended to be, and should not be, used by anyone other than these specified parties.
PA
May 21, 2012
Malloy, Montague, Karnowski, Radosevich, & Co., P.A.
5353 Wayzata Boulevard • Suitc 410 . Minncapoks, MN 55416 • Tcicphoac: 952- 545.0424 • Tcicfax: 952. 545 -0569 • www.mmkr.com
AUDIT SUMMARY
The following is a summary of our audit work, key conclusions, and other information that we consider
important or that is required to be communicated to the City Council, administration, or those charged
with governance of the City.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA AND Gov ERNMENTAUDiHNG 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, 2011. 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, 2011:
• We have issued an unqualified opinion on the City's financial statements.
• 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.
REISSUANCE OF SINGLE AUDIT OF FEDERAL AWARDS EXPENDITURES FOR 2010
During our 2011 audit, we found a federal program with federal expenditures of $411,739 that should
have been reported on the City's Schedule of Expenditures of Federal Awards (SEFA) for the year ended
December 31, 2010. This represented a material misstatement of the City's 2010 SEFA, and was a major
program that should have been tested in the City's Single Audit for that period. We performed the
required testing in order to reissue the City's 2010 SEFA and the related opinions and reports on internal
control and compliance. As a result of the omission of this major program from the City's original 2010
SEFA, our reissued opinion on the City's compliance with reporting requirements that could have a direct
and material effect on each major federal program for 2010 was qualified, and we reported a material
weakness involving the City's internal control over reporting that could have a direct and material effect
on each major federal program.
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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 I of the notes to basic financial statements.
For the year ended December 31, 2011, the City has implemented Governmental Accounting Standards
Board (GASB) Statement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions."
This statement established new fund balance classifications that comprise a hierarchy based primarily on
the extent to which a government is bound to observe constraints imposed upon the use of the resources
reported in governmental funds. It also clarifies existing governmental fund type definitions to improve
the comparability of governmental fund financial statements.
We noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in
the proper period.
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are trivial, and communicate them to the appropriate level of management.
Where applicable, management has corrected all such misstatements. In addition, none of the
misstatements detected as a result of audit procedures and corrected by management, when applicable,
were material, either individually or in the aggregate, to each opinion unit's financial statements taken as
a whole.
ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS
Accounting estimates are an integral part of the basic 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 as
follows:
• Value of Land Held for Resale — These assets are stated at the lower of cost or net realizable
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.
• Net Other Postemployment Benefit (OPEB) Liabilities — Actuarial estimates of the net OPEB
obligation is based on eligible participants, estimated future health insurance premiums, and
estimated retirement dates.
We evaluated the key factors and assumptions used by management in the areas discussed above in
determining that they are reasonable in relation to the financial statements taken as a whole.
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.
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DISAGREEMENTS WITH MANAGEMENT
For purposes of this report, professional standards define a disagreement with management as a financial
accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be
significant to the financial statements or the auditor's report. We are pleased to report that no such
disagreements arose during the course of our audit.
MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 21, 2012.
MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the City's financial statements or a determination of the type of
auditor's opinion that may be expressed on those statements, our professional standards require the
consulting accountant to check with us to determine that the consultant has all the relevant facts. To our
knowledge, there were no such consultations with other accountants.
OTHER AUDIT FINDINGS OR ISSUES
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
Our audit was conducted for the purpose of forming opinions on the financial statements that collectively
comprise the City's basic financial statements. Other information, including the introductory section,
combining and individual fund statements and schedules, supplementary information, and the statistical
section accompanying the basic financial statements are presented for purposes of additional analysis and
are not required parts of the basic financial statements.
With respect to the combining and individual fund statements and schedules accompanying the financial
statements, we made certain inquiries of management and evaluated the form, content, and methods of
preparing the information to determine that the information complies with accounting principles generally
accepted in the United States of America, the method of preparing it has not changed from the prior
period, and the information is appropriate and complete in relation to our audit of the financial statements.
We compared and reconciled the combining and individual fund statements and schedules to the
underlying accounting records used to prepare the basic financial statements or to the basic financial
statements themselves.
With respect to the introductory section, supplementary information, and statistical section accompanying
the financial statements, our procedures were limited to reading this other information, and in doing so we
did not identify any material inconsistencies with the audited financial statements.
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FUNDING CITIES IN MINNESOTA
LEGISLATION
The 2011 legislative session began with the state facing a projected budget deficit of $6.2 billion (later
revised down to $5.0 billion in the February 2011 Economic Forecast) for the 2012 -2013 biennium. In
addition, the 2010 election dramatically changed the state's political landscape. A Democratic Governor
was in power for the first time since 1991, while Republicans had majority control of both the House and
the Senate for the first time since 1971. Predictably, as the session progressed, the Governor and
Legislature had difficulty agreeing on a state budget for the next biennium. Shortly after the 2011 regular
session ended, the Governor vetoed eight major state appropriation bills and the omnibus tax bill passed
by the Legislature, which left the majority of state agencies without a budget for the next fiscal year. This
resulted in a shutdown of "nonessential" state agencies that began July 1, 2011 and effectively ended with
the passing of appropriation bills in a special session on July 19th and 20th.
The large projected budget deficit facing the 2011 Legislature was typical of the financial challenges the
state has experienced in recent years. Unfavorable economic conditions have caused a steady
deterioration of the state's financial condition, which has resulted in a series of cuts and holdbacks in state
aids to local governments and other entities. As was the case in the last biennium, the Legislature utilized
several one -time revenue sources, transfers, and accounting shifts to minimize the need for tax increases
or state aid cuts to balance the state budget.
The following is a summary of significant legislative activity passed in calendar year 2011 affecting the
finances of Minnesota cities:
Local Government Aid (LGA) and Market Value Homestead Credit (MVHC) — One of the
appropriation bills passed in the 2011 special session was the omnibus tax bill, which includes the
appropriations for LGA and MVHC.
The Legislature retroactively reduced the fiscal 2011 appropriation for LGA by approximately
$102 million, leaving a total appropriation of $425.3 million for 2011 LGA. Minnesota cities will
receive 2011 LGA equal to the lesser of their final 2010 LGA (after the cuts by the Legislature and
Governor) or their 2011 certified LGA amount. The first half LGA payment for 2011 was also
delayed one week to July 27, so the reduced LGA amounts could be recomputed after the government
shutdown. The total LGA appropriation for fiscal 2012 will be $425.2 million, with cities again
receiving the lesser of their 2010 actual or 2011 certified amounts. In essence, this bill extended the
LGA cuts originally made in fiscal 2010 for the two subsequent years. For fiscal 2013 and beyond,
the LGA appropriation is set at $426.4 million, to be allocated using the LGA formula.
The omnibus tax bill also extended the 2010 MVHC reductions of approximately $48 million to
fiscal2011, with cities to receive the same allocation. Beginning in fiscal 2012, the MVHC
reimbursement program is eliminated. Rather than receiving a property tax credit, qualifying
homeowner taxpayers will have a portion of the market value of their house excluded from their
taxable market value. This new system will provide homeowners property tax relief by shifting a
portion of their potential tax burden to other property classifications, rather than directly reducing
their taxes through a state paid tax credit reimbursement. While this new homestead exclusion is
calculated in a similar manner to the repealed MVHC, the actual tax relief to individual homeowner
taxpayers may vary significantly depending on the makeup of the taxing jurisdictions that levy on
their particular property.
The agriculture market value credit, however, will continue as a state -paid tax credit.
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Levy Limitations — A 2008 law limited general operating property tax levy increases for cities with
populations over 2,500 to an inflationary increase based on the state determined implicit price deflator
(IPD) to a maximum of 3.9 percent annually for the next three calendar years. Modifications were
made in subsequent legislative sessions to allow cities subject to levy limitation to declare "special
levies" to replace the LGA and MVHC losses. The 2010 Legislature also established a floor of
zero percent for the inflationary increase, so levies would not be reduced in the event of IPD
deflation. The 2011 Legislature passed an omnibus tax bill during the regular session that would have
extended levy limits for two years (taxes payable in 2012 and 2013). However, this was among the
bills vetoed by the Governor, and the final omnibus tax bill passed in the special session did not
address levy limits.
Sales and Use Taxes — A number of changes and clarifications were made to Minnesota sales and use
tax provisions, including:
• Made water used directly for public safety purposes (fighting fires) exempt from sales tax.
• Expanded the sales tax exemption for the lease of motor vehicles used as ambulances to the
lease of vehicles used for emergency response.
• Added townships to the list of entities exempt from sales tax.
• Provided an exemption from sales tax for technology and electricity for qualifying large data
centers as a business incentive.
• Clarified the sales tax regulations for online hotel sales.
"Buy American" Provision Repealed — The "Buy American" provision, enacted in 2010, which
prohibited public employers from purchasing or requiring employees to purchase any uniforms, safety
equipment, or protective accessories not manufactured in the United States, was repealed. Cities may
continue to purchase American-made uniforms and equipment, but they are not required to do so.
Prohibition of Referendum Spending — Political subdivisions, including cities, are prohibited from
expending funds to promote a referendum to support imposing a local option sales tax. The political
subdivision may only expend funds to conduct the referendum.
Tax Exempt Period for Economic Development Property — The maximum allowable holding
period for property held by a political subdivision for economic development to be exempt from
property taxes was increased from eight years to nine years.
Concurrent Detachment of Parcels — State law for the concurrent detachment of property from one
city to another has been changed. In the past, both cities involved had to support the change for it to
be considered. Now, if the property owner and one of the involved cities petition for the detachment,
the proposed boundary adjustment qualifies for consideration.
Civil Immunity for Donated Public Safety Equipment — Immunity from civil tort claims is
extended to municipalities that donate public safety equipment to another municipality, unless the
claim is a direct result of fraud or intentional misrepresentation. The statute defines "public safety
equipment" as vehicles and equipment used in firefighter, ambulance and emergency medical
treatment services, rescue, and hazardous material response.
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PROPERTY TAXES
Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In
recent years this dependence has been heightened, as revenue from state aids and fees related to new
development have dwindled due to the struggling economy. This has placed added pressure on local
taxpayers already beset by higher unemployment, lower property values, and tighter credit markets. As a
result, municipalities in general are experiencing increases in tax delinquencies, abatements, and
foreclosures. This instability has led to significant fiscal challenges for many local governments, and
increased the investing public's concerns about the security of the municipal debt market.
Property values within Minnesota cities experienced average decreases of 3.0 percent and 5.7 percent for
taxes payable in 2010 and 2011, respectively, reflecting the weak housing market and economic
conditions experienced in recent years. In comparison, the City's taxable market value decreased
6.1 percent for taxes payable in 2010 and 7.7 percent for taxes payable in 2011. The market value for
taxes payable in 2011 is based on estimated values as of January 01, 2010.
The following graph shows the City's changes in taxable market value over the past 10 years:
Taxable Market Value
$1,800,000,000
$1,500,000,000
$1,200,000,000
$900,000,000
$ 600,000,000
$300,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
In
Tax capacity is considered the actual base available for taxation. It is calculated by applying the state's
property classification system to each property's market value. Each property classification, such as
commercial or residential, has a different calculation and uses different rates. Consequently, a city's total
tax capacity will change at a different rate than its total market value, as tax capacity is affected by the
proportion of the City's tax base that is in each property classification from year -to -year, as well as
legislative changes to tax rates. The City's tax capacity decreased 5.8 percent and 6.9 percent for taxes
payable in 2010 and 2011, respectively.
The following graph shows the City's change in tax capacities over the past 10 years:
Local Tax Capacity
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The following table presents the average tax rates applied to city residents for each of the last two levy
years, along with comparative state -wide and metro -area rates. The general increase in rates reflects both
the increased reliance of local governments on property taxes and the recent decline in tax capacities
previously discussed.
Rates expressed as a percentage of net tax capacity
All Cities
Seven - County
State -Wide
Metro Area
City of New Hope
2010 2011
2010 2011
2010
2011
Average tax rate
City
36.9 39.2
33.7 36.0
46.0
49.2
County
39.3 41.0
34.7 36.8
42.6
45.8
School
22.0 23.0
22.1 24.0
28.6
34.4
Special taxing
5.5 5.9
5.9 6.5
8.5
9.8
Total
103.7 109.1
96.4 103.3
125.7
139.2
The City's portion, as well as the total of the tax capacity rates for New Hope residents has been higher
than the state -wide and metro area averages in recent years. The City's rate has been above average since
it began using annual levies rather than special assessment bonds to finance street and park
improvements. The City's levy for 2011 was about 1.5 percent higher than the prior year due to an
increase in debt service levies. The City's tax capacity rate also increased due to the declining market
values of property within the City's taxing jurisdiction, which has reduced tax capacity.
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GOVERNMENTAL FUNDS OVERVIEW
This section of the report provides you with an overview of the financial trends and activities of the City's
governmental funds. Governmental funds include the General Fund, special revenue, debt service, and
capital projects funds. We have also included the most recent comparative state -wide averages available
from the Office of the State Auditor. The reader needs to consider the effect of inflation and other known
changes or differences when comparing this data. Also, certain data on these tables may be classified
differently than how they appear on the City's financial statements in order to be more comparable to the
state -wide information, particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report using per capita data in order to better identify
unique or unusual trends and activities of your city. We intend for this type of comparative and trend
information to complement, rather than duplicate, information in the Management's Discussion and
Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population
count, which for most years is based on estimates.
GOVERNMENTAL FUNDS REVENUE
The amounts received from the typical major sources of revenue will naturally vary between cities based
on their particular situation. This would include the City's stage of development, location, size and
density of its population, property values, services it provides, and other attributes. The following table
presents the City's revenue per capita of its governmental funds for the past three years, together with
state -wide averages:
In total, the City's governmental fund revenues for 2011 were $15,183,964, an increase of $300,594
(2.0 percent) from the prior year. On a per capita basis, the City received $747 in governmental fund
revenue for 2011, an increase of $15 from the prior year. Charges for services were $9 per capita higher
than last year, mainly due to increases in plan review and recreation program fees. Other revenue
increased $10 per capita, with most of the increase coming from an improvement of almost $155,000 in
investment income. Intergovernmental revenue, on the other hand, was $8 per capita lower than last year
as the City received about $224,000 less state and federal aid for street improvements in 2011.
in
Governmental Funds Revenue per Capita
With State -Wide Averages by Population Class
State -Wide
City of New Hope
Year
December 31, 2010
2009
2010
2011
Population
2,500- 10,000
10,000- 20,000 20,000 - 100,000
20,718
20,339
20,339
Property taxes
$ 386
$ 359 $ 407
$ 403
$ 427
$ 431
Tax increments
45
52 56
75
69
69
Franchise and other taxes
26
34 30
21
21
22
Special assessments
74
60 66
8
13
8
Licenses and permits
19
22 29
11
12
18
Intergovernmental revenues
291
271 149
68
87
79
Charges for services
89
83 76
56
67
76
Other
73
70 57
50
35
45
Total revenue
$ 1,003
$ 952 $ 869
$ 691
$ 732
$ 747
In total, the City's governmental fund revenues for 2011 were $15,183,964, an increase of $300,594
(2.0 percent) from the prior year. On a per capita basis, the City received $747 in governmental fund
revenue for 2011, an increase of $15 from the prior year. Charges for services were $9 per capita higher
than last year, mainly due to increases in plan review and recreation program fees. Other revenue
increased $10 per capita, with most of the increase coming from an improvement of almost $155,000 in
investment income. Intergovernmental revenue, on the other hand, was $8 per capita lower than last year
as the City received about $224,000 less state and federal aid for street improvements in 2011.
in
GOVERNMENTAL FUNDS EXPENDITURES
The expenditures of governmental funds will vary from state -wide averages and from year -to -year, based
on the City's circumstances. Expenditures are classified into three types as follows:
• Current — These are typically the general operating -type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
• Capital Outlay and Construction — These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year -to -year. Many of these expenditures are
project- oriented which are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
• Debt Service — Although the expenditures for the debt service may be relatively consistent over
the term of the respective debt, the funding source is the important factor. Some debt may be
repaid through specific sources such as special assessments or redevelopment funding, while
other debt may be repaid with general property taxes.
The City's expenditures per capita of its governmental funds for the past three years, together with
state -wide averages, are presented in the following table:
The City's total governmental funds expenditures were $18,956,303 for 2011, an increase of $5,105,739
(36.9 percent) from the prior year. The largest increase was in capital outlay expenditures, which were
$225 higher per capita in 2011. The City spent about $4.6 million more on capital improvements in 2011,
mainly for street infrastructure and energy conservation projects. Scheduled debt service payments were
also $26 per capita higher than last year.
in
Governmental Funds Expenditures per Capita
With State
-Wide Averages by Population Class
State -Wide
City of New Hope
Year
December 31, 2010
2009
2010
2011
Population
2,500- 10,000
10,000 - 20,000
20,000- 100,000
20,718
20,339
20,339
Current
General government
$
125
$ 102
$ 85
$
83
$ 93
$
77
Public safety
227
223
235
286
285
292
Public works
108
107
86
36
49
53
Culture and recreation
75
93
87
82
79
77
All other
81
81
91
—
9
14
$
615
$ 607
$ 583
$
487
$ 514
$
512
Capital outlay
and construction
$
299
$ 321
$ 232
$
55
$ 128
$
353
Debt service
Principal
$
180
$ 181
$ 111
$
43
$ 25
$
49
Interest and fiscal
63
53
43
13
13
17
$
242
$ 236
$ 153
$
56
$ 39
$
65
The City's total governmental funds expenditures were $18,956,303 for 2011, an increase of $5,105,739
(36.9 percent) from the prior year. The largest increase was in capital outlay expenditures, which were
$225 higher per capita in 2011. The City spent about $4.6 million more on capital improvements in 2011,
mainly for street infrastructure and energy conservation projects. Scheduled debt service payments were
also $26 per capita higher than last year.
in
FINANCIAL TRENDS AND CONDITIONS OF SELECTED FUNDS
GENERAL FUND
The City's General Fund accounts for the financial activity of the basic services provided to the
community. The primary services included within this fund are the administration of the municipal
operation, police and fire protection, building inspection, streets and highway maintenance, and culture
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 operating transfers out to reflect the
change in the size of the General Fund operation over the same period:
General Fund Financial Position
Year Ended December 31,
$11,000,000
$10,000,000
$9,000,000
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
2007 2008 2009 2010 2011
� Fund Balance O Cash Balance Expenditures and Operating Transfers Out
The City's General Fund cash and investment balance at December 31, 2011 was $4,823,007, an increase
of $467,966 from last year. The General Fund total fund balance at December 31, 2011 was $4,935,212,
an increase of $343,612 from the previous year. Unassigned fund balance at year -end was $4,920,846,
which represents approximately 49.9 percent of annual expenditures and transfers out based on 2011
levels. By comparison, unreserved fund balance at the end of the previous year represented 44.5 percent
of expenditures and transfers out.
As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels
in recent years. 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. Maintaining an adequate fund balance has become increasingly important given
the reductions in state funding for cities in recent years.
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. Taxes
comprise almost 71 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.
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The following chart reflects the City's General Fund revenue sources for 2011 compared to budget:
Property Taxes
Franchise Taxes
Licenses and Permits
Intergovernmental
Charges for Services
Fines
Other
General Fund Revenue
Budget to Actual
Millions
$— $1 $2 $3 $4 $5 $6 $7 $8
■ Budget ■ Actual
Total General Fund revenue for 2011 was $9,872,522, which was $109,083 (1.1 percent) higher than the
final budget. Property tax revenue was $116,337 under budget due to increased abatements and
delinquencies. Intergovernmental revenue was over budget by $70,636, mainly due to a county
transit - oriented development grant that was not anticipated in the budget. Charges for services were over
budget by $169,697, mainly due to higher than anticipated building plan review fees and recreation
program revenues. Revenue from court fines were $37,446 less than projected. Investment income
(included in "Other" above) was over budget by $39,921 due to improved investment market values.
The following graph presents the City's General Fund revenue sources for the last five years. The graph
reflects the City's reliance on property taxes and other local sources of revenue.
General Fund Revenue by Source
Year Ended December 31,
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
■ 2007 ❑ 2008 ■ 2009 ■ 2010 ■ 2011
Total General Fund revenue for 2011 was $170,529 (1.8 percent) higher than the prior year. Several local
revenue sources increased from the prior year due to improving economic conditions, including: licenses
and permits ($123,152), charges for services ($77,408), and investment income ($45,452). Property tax
revenue was $83,852 lower than the prior year due to a small decrease in the general levy and higher
abatements and delinquencies.
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Property Taxes Intergovernmental Other
The following graphs illustrate the components of General Fund spending for 2011 compared to budget:
General Fund Expenditures
Budget to Actual
General Government
Public Safety
Public Works
Culture and Recreation
Millions
$— $1 $2 $3 $4 $5 $6 $7
■ Budget ■ Actual
Total General Fund expenditures for 2011 were $9,870,134, which was $239,109 (2.4 percent) under the
final budget. Public safety expenditures were $139,349 under budget, primarily due to police and police
reserve salaries and benefits not increasing as much as anticipated. Public works expenditures were under
budget by $51,431, mainly in street maintenance personnel costs. Culture and recreation expenditures
were under budget by $43,546, mainly in parks department salaries and supply costs.
The following graph illustrates the City's General Fund expenditures by function over the last five years:
General Fund Expenditures by Function
Year Ended December 31,
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
02007 112008 ®2009 02010 02011
Total General Fund expenditures decreased by $80,387 (0.8 percent) from the previous year. Public
works expenditures were $177,698 less than last year, mainly due to lower tree removal costs and central
garage charges. General government and culture and recreation expenditures also decreased by $22,846
and $39,686, respectively. Public safety costs increased $159,843, mainly in police and fire costs.
General Government Public Safety Public Works Culture and Recreation
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SEWER UT ILrry FUND
The following graph presents five years of operating results for the City's sewer utility operation.
Information for the fiscal years 2007 through 2009 is based on an estimated split of the City's water and
sewer operations, which were reported in a single fund during these years.
Sewer Utility Operating Results
Year Ended December 31,
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
2007 2008 2009 2010 2011
o Operating Revenue � Operating Expenses
Operating Income (Loss)
The Sewer Utility Fund ended 2011 with net assets of $2,124,245, of which $1,434,560 represents the
investment in sewer collection system capital assets, and $689,685 is unrestricted net assets. Net assets
increased in the current year by $315,340.
Operating revenue in the Sewer Utility Fund for 2011 was $2,352,635, an increase of $60,335
(2.6 percent) from the previous year, due primarily to an increase in sewer rates.
Operating costs for 2011 were $1,997,303, an increase of $135,296 from the prior year. Sewer Utility
Fund expenses increased in several areas, including: disposal charges paid to Metropolitan Council
Environmental Services ($58,129), personnel costs ($34,613), and purchased services ($33,859).
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WATER UTILrry FUND
The following graph presents five years of operating results for the City's water utility operation.
Information for the fiscal years 2007 through 2009 is based on an estimated split of the City's water and
sewer operations, which were reported in a single fund during those years.
Water Utility Operating Results
Year Ended December 31,
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$(500,000)
f►.IIIIy�AD�:�.III1II I D�4111I
o Operating Revenue Operating Expenses
Operating Income (Loss)
The Water Utility Fund ended 2011 with net assets of $4,783,390, of which $3,344,451 represents the
fund's investment in water distribution system capital assets, and $1,438,939 is unrestricted net assets.
Water Utility Fund net assets increased $1,753,220 in 2011.
Operating revenue in the Water Utility Fund for 2011 was $3,130,311, an increase of $83,007
(2.7 percent) from the previous year, due primarily to an increase in water rates.
Operating costs for 2011 were $3,375,515, an increase of $568,318 from the prior year. Water purchases
increased $473,739, mainly due to the City of Minneapolis charging higher rates for the purchase of
water. Other services and charges also increased $152,489, mainly in repairs and central garage charges.
The Water Utility Fund also received transfers of $2,000,000 for system improvements.
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GOLF COURSE FUND
The following graph presents five years of operating results for the City's Golf Course Fund:
Golf Course Fund
Year Ended December 31,
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$(50,000)
$(100,000)
2007 2008 2009 2010 2011
D Operating Revenue � Operating Expenses
Operating Income (Loss)
The Golf Course Fund ended 2011 with net assets of $362,615, a decrease of $36,014 from the prior year.
Of this, $688,843 represents the investment in capital assets, leaving a ($326,228) deficit in unrestricted
net assets.
Golf Course Fund operating revenue for 2011 was $273,064, a decrease of $32,494 (10.6 percent).
Revenue decreased due to a decline in the number of rounds played, which was primarily the result of the
weather.
Operating expenses were $313,264, which was a decrease of $5,125 from the prior year. The main cause
if this decrease was a $9,302 drop in depreciation expense.
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ICE ARENA FUND
The following graph presents five years of operating results for the City's Ice Arena Fund:
Ice Arena Fund
Year Ended December 31,
$ 800,000
$ 700,000
$ 600,000
$ 500,000
$400,000
$300,000
$200,000
$100,000
$(100,000)
$(200,000)
2007 2008 2009 2010 2011
D Operating Revenue � Operating Expenses
Operating Income (Loss)
The Ice Arena Fund ended 2011 with net assets of $3,388,899, a decrease of $97,583 from the prior year.
Of this, $2,981,706 represents the investment in capital assets, leaving $407,193 of unrestricted net assets.
Ice Arena Fund operating revenue for 2011 was $752,671, an increase of $11,405 (1.5 percent) from the
prior year, with the increase coming mainly from increased ice rental to area school districts. Operating
expenses were $733,882, which was $36,561 higher than the prior year. The increase was mainly in two
areas, personnel costs ($21,101) and utilities ($20,876).
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STORM WATER FUND
The following graph presents five years of operating results for the City's Storm Water Fund:
Storm Water Fund
Year Ended December 31,
$1,000,000
$ 900,000
$ 800,000
$ 700,000
$ 600,000
$ 500,000
$400,000
$300,000
$200,000
$100,000
2007 2008 2009 2010 2011
O Operating Revenue � Operating Expenses
Operating Income (Loss)
The Storm Water Fund ended 2011 with net assets of $4,670,544, an increase of $635,327 from the prior
year. Of this, $2,893,313 represents the investment in storm water collection system capital assets,
leaving $1,777,231 in unrestricted net assets.
Storm Water Fund operating revenues for 2011 were $947,031, an increase of $3,148 (0.3 percent) from
the previous year.
Operating expenses were $409,215, an increase of $62,063. Other services and charges increased
$49,465, mainly in repair costs and central garage charges.
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STREET LIGHTING FUND
The following graph presents five years of operating results for the City's Street Lighting Fund:
Street Lighting Fund
Year Ended December 31,
$165,000
$150,000
$135,000
$120,000
$105,000
$90,000
$75,000
$60,000
$45,000
$30,000
$15,000
$(15,000)
2007 2008 2009 2010 2011
O Operating Revenue � Operating Expenses
Operating Income (Loss)
The Street Lighting Fund ended 2011 with unrestricted net assets of $177,682, an increase of $13,743
from the prior year.
Street Lighting Fund operating revenues for 2011 were $122,742, an increase of $1,095 (0.9 percent)
from the previous year.
Operating expenses were $113,753, which was $9,654 higher than the previous year due primarily to an
increase in electric utility costs of $7,651.
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GOVERNMENT -WIDE FINANCIAL STATEMENTS
The City's financial statements include fund -based information that focuses on budgetary compliance,
and the sufficiency of the City's current assets to finance its current liabilities. The GASB Statement
No. 34 reporting model also requires the inclusion of two government -wide financial statements designed
to present a clear picture of the City as a single, unified entity. These government -wide statements
provide information on the total cost of delivering services, including capital assets and long -term
liabilities of the City's governmental activities.
Statement of Net Assets
The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time,
the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use
for providing services after its debts are settled. However, those resources are not always in spendable
form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement
of Net Assets divides the net assets into three components: net assets invested in capital assets, net of
related debt; restricted net assets; and unrestricted net assets.
The following table presents the components of City's net assets as of December 31, 2011 and 2010, for
governmental activities and business -type activities:
The City's total net assets at December 31, 2011 were $3,535,440 higher than the beginning of the year.
Governmental activities net assets increased $1,217,477 in total, mainly due to capital improvements
funded by external sources. Business -type net assets increased $2,317,963, mainly due to positive
operating results in the Sewer Utility and Storm Water Utility Funds, and transfers of $1.77 million from
the governmental activities.
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As of December 31,
Increase
2011
2010
(Decrease)
Net assets
Governmental activities
Invested in capital assets,
net of related debt
$ 20,399,936
$ 16,495,175
$ 3,904,761
Restricted
6,018,734
9,279,142
(3,260,408)
Unrestricted
22,544,601
21,971,477
573,124
Total governmental activities
48,963,271
47,745,794
1,217,477
Business -type activities
Invested in capital assets,
net of related debt
11,342,873
9,989,405
1
Unrestricted
3,505,651
2,541,156
964,495
Total business -type activities
14,848,524
12,530,561
2,317,963
Total net assets
$ 63,811,795
$ 60,276,355
$ 3,535,440
The City's total net assets at December 31, 2011 were $3,535,440 higher than the beginning of the year.
Governmental activities net assets increased $1,217,477 in total, mainly due to capital improvements
funded by external sources. Business -type net assets increased $2,317,963, mainly due to positive
operating results in the Sewer Utility and Storm Water Utility Funds, and transfers of $1.77 million from
the governmental activities.
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Statement of Activities
The Statement of Activities tracks the City's yearly revenues and expenses, as well as any other
transactions that increase or reduce total net assets. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund -based financial statements. This statement includes the
cost of supplies used, depreciation of long -lived capital assets, and other accrual -based expenses.
The following table presents the change in net assets of the City for the years ended December 31, 2011
and 2010:
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.
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2011
2010
Program
Expenses
Revenues
Net Change
Net Change
Net (expense) revenue
Governmental activities
General government
$ 1,841,145
$ 443,557
$ (1,397,588)
$ (1,287,994)
Public safety
6,129,860
1,124,696
(5,005,164)
(5,400,824)
Public works
1,795,189
1,492,822
(302,367)
(97,002)
Culture and recreation
1,882,279
649,281
(1,232,998)
(1,282,304)
Economic development
536,433
236,145
(300,288)
(52,549)
Interest on long -term debt
248,174
—
(248,174)
(252,224)
Business -type activities
Sewer utility
2,070,951
2,352,635
281,684
363,455
Water utility
3,535,160
3,204,344
(330,816)
438,455
Golf course
322,679
278,788
(43,891)
(32,404)
Ice arena
746,218
752,671
6,453
29,113
Storm water
490,336
1,047,683
557,347
742,465
Street lighting
113,753
122,742
8,989
17,548
Total net (expense) revenue
S 19,712,177
S 11,705,364
(8,006,813)
(6,814,265)
General revenues
Property taxes and tax increments
10,185,111
10,139,235
Franchise taxes
439,795
430,494
Unrestricted grants and contributions
87,206
79,529
Unrestricted investment earnings
816,573
354,712
Gain on disposal of assets
13,568
22,930
Total general revenues
11,542,253
11,026,900
Change in net assets
$ 3,535,440
$ 4,212,635
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.
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ACCOUNTING AND AUDITING UPDATES
GASB STATEMENT N0.60 - ACCOUNTING AND FINANCIAL REPORTING FOR SERVICE CONCESSION
ARRANGEMENTS
This statement provides accounting and financial reporting guidance for governments that participate as
either a transferor or an operator in a service concession arrangement (SCA). SCAB are arrangements
whereby a government transfers the rights to operate one of its capital assets to a third party operator
(either a private party or another government) for consideration, with the operator then being
compensated from the fees or charges collected in connection with the operation of the asset. To qualify
as an SCA, an arrangement must meet all of the following criteria: 1) the transferor must convey to the
operator both the right and the obligation to use one of its capital assets to provide services to the public;
2) the operator must provide significant consideration to the transferor; 3) the operator must be
compensated from the fees or charges it collects from third parties; 4) the transferor must have the ability
to either determine, modify, or approve what services are to be provided to whom at what price; and
5) the transferor must retain a significant residual interest in the service utility of the asset. This statement
provides guidance to governments that are party to an SCA for reporting the assets, obligations, and flow
of revenues that result from the arrangement; along with the required financial statement disclosures. The
requirements of this statement must be implemented for periods beginning after December 15, 2011, with
earlier implementation encouraged.
GASB STATEMENT N0.61— THE FINANCIAL REPORTING ENTITY: OMNIBUS
This statement amends the current guidance in GASB Statement No. 14, "The Financial Reporting
Entity," for identifying and presenting component units. This statement changes the fiscal dependency
criterion for determining component units. Potential component units that meet the fiscal dependency
criterion for inclusion in the financial reporting entity under existing guidance will only be included if
there is also "financial interdependency" (an ongoing relationship of potential financial benefit or burden)
with the primary government. This statement also clarifies the types of relationships that are considered
to meet the "misleading to exclude" criterion for inclusion as a component unit; changes the criteria for
blending component units; gives direction for the determination and disclosure of major component units;
and adds a requirement to report an explicit, measurable equity interest in a discretely presented
component unit in a statement of position prepared using the economic resources measurement focus.
The requirements of this statement must be implemented for periods beginning after June 15, 2012, with
earlier implementation encouraged.
GASB STATEMENT N0.63 - FINANCIAL REPORTING OF DEFERRED OUTFLOWS OF RESOURCES,
DEFERRED INFLOWS OF RESOURCES, AND NET POSITION
This statement provides financial reporting guidance for deferred outflows of resources and deferred
inflows of resources; which are defined as the consumption or acquisition of net assets, respectively,
applicable to a future reporting period. The statement amends certain reporting requirements in GASB
Statement No. 34 and related pronouncements, providing a format for a new Statement of Net Position,
which reports deferred outflows of resources and deferred inflows of resources separately from assets and
liabilities. It also renames the residual of assets, deferred outflows of resources, liabilities, and deferred
inflows of resources as net position, rather than net assets. The requirements of this statement must be
implemented for periods beginning after December 15, 2011, with earlier implementation encouraged.
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GASB PENSION EXPOSURE DRAFTS
In June 2011, GASB issued two exposure drafts on accounting and reporting for pensions, one for the
reporting of pension benefits within the financial statements of participating employers and the other for
pension plan financial reporting. These two exposure drafts are intended to update or replace the current
guidance for pension reporting in GASB Statement Nos. 25 and 27.
The exposure drafts propose a variety of changes in financial statement presentation, measurement, and
required disclosures relating to pension benefits. Included are proposed major changes in how employers
that participate in cost - sharing defined benefit pension plans, such as TRA and PERA, account for
pension benefit expenses and liabilities. Currently, employers participating in such plans recognize
pension expenses and liabilities only to the extent of their contractually required annual contributions to
the plan. The exposure draft proposes that those employers recognize their proportionate share of the
collective net pension liability and collective pension expense for all participating employers. If adopted,
this guidance could have a significant impact on the financial statements of the participating employers,
as participants in plans with a substantial unfunded liability would be required to report their
proportionate share of the unfunded liability in their government -wide financial statements.
The proposed effective dates for both exposure drafts are for periods beginning after June 15, 2012, if
certain conditions are met, otherwise for periods beginning after June 30, 2013.
FEDERAL FUNDING ACCOUNTABILITY AND TRANSPARENCY ACT (TRANSPARENCY ACT)
Effective October 1, 2010, the Transparency Act requires federal award recipients to report specific data,
including compensation data in certain circumstances, related to subawards. One of the key requirements
of the Transparency Act was the creation of a single, searchable website that provides the public with
greater access to information on federal spending. The Transparency Act requires recipients to report
first -tier subaward and executive compensation data for new federal grants as of October 1, 2010, if the
initial award is equal to or over $25,000. Pass through entities (primary recipients) must report subaward
data through the Federal Funding Accountability and Transparency Subaward Reporting System (FSRS)
by the end of the month following the month in which the subaward obligation is made. For a more
detailed discussion of the Transparency Act see Part 3, Section L of the 2011 U.S. Office of Management
and Budget (OMB) Circular A -133 Compliance Supplement available at www.whitchouse.gov /omb. The
OMB has issued several documents that provide guidance on the Transparency Act, including Open
Government Directive Federal Spending Transparency and Subaward and Compensation Data
Reporting, available at www.whitchouse.gov /omb /open.
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