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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. -1- SIGNIFICANT ACCOUNTING POLICIES Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note 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. -2- 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. -3- 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. -4- Levy Limitations — A 2008 law limited general operating property tax levy increases for cities with populations over 2,500 to an inflationary increase based on the state determined implicit price deflator (IPD) to a maximum of 3.9 percent annually for the next three calendar years. Modifications were made in subsequent legislative sessions to allow cities subject to levy limitation to declare "special levies" to replace the LGA and MVHC losses. The 2010 Legislature also established a floor of zero percent for the inflationary increase, so levies would not be reduced in the event of IPD deflation. The 2011 Legislature passed an omnibus tax bill during the regular session that would have extended levy limits for two years (taxes payable in 2012 and 2013). However, this was among the bills vetoed by the Governor, and the final omnibus tax bill passed in the special session did not address levy limits. Sales and Use Taxes — A number of changes and clarifications were made to Minnesota sales and use tax provisions, including: • Made water used directly for public safety purposes (fighting fires) exempt from sales tax. • Expanded the sales tax exemption for the lease of motor vehicles used as ambulances to the lease of vehicles used for emergency response. • Added townships to the list of entities exempt from sales tax. • Provided an exemption from sales tax for technology and electricity for qualifying large data centers as a business incentive. • Clarified the sales tax regulations for online hotel sales. "Buy American" Provision Repealed — The "Buy American" provision, enacted in 2010, which prohibited public employers from purchasing or requiring employees to purchase any uniforms, safety equipment, or protective accessories not manufactured in the United States, was repealed. Cities may continue to purchase American-made uniforms and equipment, but they are not required to do so. Prohibition of Referendum Spending — Political subdivisions, including cities, are prohibited from expending funds to promote a referendum to support imposing a local option sales tax. The political subdivision may only expend funds to conduct the referendum. Tax Exempt Period for Economic Development Property — The maximum allowable holding period for property held by a political subdivision for economic development to be exempt from property taxes was increased from eight years to nine years. Concurrent Detachment of Parcels — State law for the concurrent detachment of property from one city to another has been changed. In the past, both cities involved had to support the change for it to be considered. Now, if the property owner and one of the involved cities petition for the detachment, the proposed boundary adjustment qualifies for consideration. Civil Immunity for Donated Public Safety Equipment — Immunity from civil tort claims is extended to municipalities that donate public safety equipment to another municipality, unless the claim is a direct result of fraud or intentional misrepresentation. The statute defines "public safety equipment" as vehicles and equipment used in firefighter, ambulance and emergency medical treatment services, rescue, and hazardous material response. -5- PROPERTY TAXES Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In recent years this dependence has been heightened, as revenue from state aids and fees related to new development have dwindled due to the struggling economy. This has placed added pressure on local taxpayers already beset by higher unemployment, lower property values, and tighter credit markets. As a result, municipalities in general are experiencing increases in tax delinquencies, abatements, and foreclosures. This instability has led to significant fiscal challenges for many local governments, and increased the investing public's concerns about the security of the municipal debt market. Property values within Minnesota cities experienced average decreases of 3.0 percent and 5.7 percent for taxes payable in 2010 and 2011, respectively, reflecting the weak housing market and economic conditions experienced in recent years. In comparison, the City's taxable market value decreased 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. -7- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City's governmental funds. Governmental funds include the General Fund, special revenue, debt service, and capital 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. -10- 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. -11- 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 -12- 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). -13- 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. -14- 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. -15- 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). -16- 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. -17- 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. -18- 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. -19- 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. -19- 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. -20- 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. -20- 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. -21- 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. -22-