2012 Management ReportManagement Report
for
City of New Hope
Hennepin County, Minnesota
December 31, 2012
MMKR
CERTIFIE[ PUBLIC
ACCOUNTANTS
City Council and Management
City of New Hope, Minnesota
PRINCIPALS
Thomas M. Montague, (TA
Thomas A. Karnowski, CPA
Paul A. Radosevieh, 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, 2012. 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
• Enterprise Funds Overview
• Government -Wide Financial Statements
• Accounting and Auditing Updates
We would be pleased to fixrther discuss any of the information contained in this report or any other
concerns that you would like us to address. We would also like to express our thanks for the courtesy and
assistance extended to us during the course of our audit.
The purpose of this report is solely to provide those charged with governance of the City, management,
and those who have responsibility for oversight of the financial reporting process comments resulting
from our audit process and information relevant to city finances in Minnesota. Accordingly, this report is
not suitable for any other purpose.
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Minneapolis, Minnesota
May 16, 2013
Malloy, Montague, Karnowski, Radosevich, & Co., P.A.
5353 Wayzata Boulevard • Suite 410 • Min —ap.hi . MN 55416 • Telephone: 952 - 545 -0424 • Td fax: 952.545.0569 • --.kr —m
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, 2012. 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, 2012:
• 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 one finding based on our testing of the City's compliance with Minnesota laws and
regulations. One disbursement selected for testing was not paid within 35 days of the receipt of
goods or services, or the invoice for goods or services, as required by Minnesota statutes.
SIGNIFICANT ACCOUNTING POLICIES
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 of the notes to basic financial statements.
For the fiscal year ended December 31, 2012, the City implemented Governmental Accounting Standards
Board (GASB) Statement No. 63, Financial Reporting of Deferred Ouflows of Resources, Deferred
Inflows of Resources, and Net Position, and GASB Statement No. 65, Items Previously Reported as
Assets and Liabilities. GASB Statement No. 63 changed how governmental entities present a statement
of net position, adding two new basic financial statement elements, and replacing "net assets" with "net
position" as the terminology used to describe the difference between the other four elements. The two
basic financial statement elements added are "deferred inflows of resources" and "deferred outflows of
resources." These new elements are differentiated from assets (deferred outflows of resources) and
liabilities (deferred inflows of resources), but have similar effects on net position.
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GASB Statement No. 65 identifies specific items previously presented as assets that will now be
presented as either deferred outflows of resources or outflows (expenses /expenditures), and items
previously reported as liabilities that will now be presented as deferred inflows of resources or inflows
(revenues).
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 financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions about
future events. Certain accounting estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The most sensitive estimates affecting the financial statements were:
• Value of Land Held for Resale — These assets are stated at the lower of cost or 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 Post - Employment 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 basic 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.
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.
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MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 16, 2013.
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, and 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 and statistical sections 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 was very long and difficult. It featured a large budget deficit and a very
contentious battle between the Democratic Governor and the Republican -led House and Senate; and
resulted in numerous vetoes, a special session, and the longest shutdown of non - essential state
government services in Minnesota history.
The outlook going into the 2012 Legislative Session was brightened somewhat by positive economic
news. The November 2011 financial forecast projected a surplus of $876 million in the state general fund
for the biennium ending June 30, 2013, later revised to a surplus of almost $1.2 billion in the
February 2012 forecast. This meant that the Legislature would not have to pass a "supplemental budget"
to deal with projected shortfalls for the second half of the biennium, as was the case in the previous short
session.
The positive feeling was short- lived, however, as the 2012 Legislative Session quickly degenerated into
more partisan squabbling. Once again, the Governor exercised his veto power a number of times to block
Republican legislative initiatives. The Republican Legislature reacted by introducing several potential
amendments to the state constitution, which once passed would be subject to a public vote and could not
be vetoed by the Governor. Two potential amendments, addressing voter identification and the legal
definition of marriage, made it on the ballot for the November 2012 election and were voted down by the
public. In the end, the main accomplishment of the session was a hard - fought compromise on partial
public funding for a Vikings stadium.
The 2012 Legislature did pass a state bonding bill, a technical tax bill (after two omnibus tax bills were
vetoed), and a few other bills that impacted Minnesota cities. The following is a summary of recent
legislative activity affecting the finances of Minnesota cities in 2012 and into the future:
Local Government Aid (LGA) — The state -wide LGA appropriation for fiscal 2012 was
$425.2 million. For fiscal 2012, cities received the lesser of their 2010 actual or 2011 certified
LGA allocations. For fiscal 2013 and beyond, the state -wide LGA appropriation had been set to
increase to $426.4 million; however, the 2012 Legislature made some changes. LGA payments for
2013 are frozen at 2012 levels for cities with a population of 5,000 or more. For cities with
populations below 5,000, 2013 LGA will be the greater of their 2012 aid or the amount they would
have received for 2013 under existing law. The Legislature also froze the base for calculating the
maximum increases and decreases for a city's 2013 and 2014 LGA to their 2012 aid. Beginning in
2015, the previous year's LGA payment will be used to calculate the minimum and maximum
increases.
Market Value Homestead Credit (MVHC) — The 2011 Legislature eliminated the MVHC
reimbursement program beginning in fiscal 2012. Rather than receiving a property tax credit,
qualifying homeowner taxpayers had a portion of the market value of their house excluded from their
taxable market value. This new system provides 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 varies
depending on the makeup of the taxing jurisdictions that levy on their particular property.
Depositories Authorized to Redeposit City Funds — Banks designated as depositories of city funds
are authorized to redeposit the funds in another bank, savings and loan, or credit union located within
the United States, provide the redeposited funds are fully covered by federal depository insurance
(FDIC or NCUA). This law change was enacted to make additional federal depository insurance
available to cover municipal deposits in anticipation of the December 31, 2012 sunset of the
temporary unlimited coverage for non - interest bearing municipal accounts provisions of the
Dodd -Frank Act.
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Municipal State Aid (MSA) Eligibility — Three changes were made that protect the MSA of cities
dropping below a population of 5,000, which is the eligibility threshold for receiving MSA for street
maintenance. Under previous law, if a city that formerly had a population of 5,000 or more fell below
a 5,000 population at the 2010 decennial census, it would have been ineligible for MSA beginning in
fiscal 2012. The first change enacted allows previously eligible cities falling below 5,000 population
at a decennial census to continue to be considered to have a population of 5,000 for purposes of
calculating MSA, thereby remaining eligible, until the end of the fourth year of the decade. The
second change enacted states that for purposes of calculating MSA, which is based 50 percent on
population, a city is deemed to have a population equal to the greater of 5,000 or as otherwise
determined by statute. The final change requires that, for 2013 MSA only, the aid be allocated in a
manner that backfills the MSA cities lost in 2012 due to population drops.
Contractor Bond Threshold — The threshold at which a municipality is required to obtain contractor
performance and payment bonds for public construction contracts was increased from $75,000 to
match the current competitive bid law threshold of $100,000.
Municipal Detachment of Parcels — A number of corrections and clarifications were made related to
petitions for the detachment of parcels from a municipality. The changes affect petition requirements,
the hearing process, and the sharing of associated hearing and mediation costs with the landowners.
Tort Liability Limits for Cities Contracting With Certain Nonprofits — The liability limit on
claims against cities involving nonprofit organizations that are engaged in or administer outdoor
recreational activities that are funded or authorized by a municipality were lowered from $1.5 million
to $1.0 million.
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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 due to reductions in state aids and fees from new
development due to the struggling economy. As a result, many cities have repeatedly been faced with the
difficult choice of either reducing services or increasing taxes on their already overburdened constituents.
Property values within Minnesota cities experienced average decreases of 5.7 percent and 8.8 percent for
taxes payable in 2011 and 2012, respectively, as market values have continued to slide despite recent
signs of improvement in other areas of the economy. In comparison, the City's taxable market value
decreased 7.7 percent for taxes payable in 2011 and 11.4 percent for taxes payable in 2012. The market
value for taxes payable in 2012 is based on estimated values as of January 1, 2011.
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
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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 6.9 percent and 9.5 percent for taxes
payable in 2011 and 2012, 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
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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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.
Rates expressed as a percentage of net tax capacity
All Cities Seven - County
State -Wide Metro Area City of New Hope
2011 2012 2011 2012 2011 2012
Average tax rate
City
42.5
46.3
40.0
43.4
53.1
55.2
County
43.7
46.8
42.1
45.0
45.8
48.2
School
25.2
27.3
26.8
28.5
30.7
32.8
Special taxing
6.4
6.8
8.1
8.7
9.9
10.2
Total
117.8
127.2
117.0
125.6
139.5
146.4
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 2012 was unchanged from the previous year, so the increase in the City's portion of
the tax capacity rate was due to the declining market values of property within the City's taxing
jurisdiction.
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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, which includes the General Fund, special revenue, debt service, and capital project
funds. These funds are used to account for the basic services the City provides to all of its citizens, which
are financed primarily with property taxes. The governmental fund information in the City's financial
statements focuses on budgetary compliance, and the sufficiency of each governmental fund's current
assets to finance its current liabilities.
GOVERNMENTAL FUND BALANCES
The following table summarizes the changes in the fund balances of the City's governmental funds during
the year ended December 31, 2012, presented both by fund balance classification and by fund:
Governmental Funds Change in Fund Balance
Fund Balance
As of December 31, Increase
2012 2011 (Restated) (Decrease)
Fund Balances of Governmental Funds
Total by classification
Nonspendable
Restricted
Committed
Assigned
Unassigned
$ 14,925 $ 14,366 $ 559
5,657,606 6,114,114 (456,508)
5,165,192 4,666,447 498,745
6,533,868 6,877,641 (343,773)
5,080,812 4,920,846 159,966
Total — governmental funds
$ 22,452,403 $ 22,593,414 $ (141,011)
Total by fund
General
$ 5,095,737
$ 4,935,212
$ 160,525
Economic Development Authority Special Revenue
4,989,473
4,479,550
509,923
HRA Construction Capital Project
1,319,423
5,554,293
(4,234,870)
Temporary Financing Capital Project
3,082,536
3,007,417
75,119
HRA Bonds Debt Service
4,073,402
292,921
3,780,481
Nonmajor funds
3,891,832
4,324,021
(432,189)
Total — governmental funds
$ 22,452,403 $ 22,593,414 $ (141,011)
In total, the fund balances of the City's governmental funds decreased by $141,011 during the year ended
December 31, 2012. The $456,508 decrease in restricted fund balances was mainly the result of
$4.2 million spent for capital improvements out of fund balance restricted for economic development in
the HRA Construction Capital Project Fund, offset by a $3.8 million increase in fund balance restricted
for debt service in the HRA Bonds Debt Service Fund due to the issuance of refunding bonds. The
$498,745 increase in committed fund balance was primarily in committed for economic development in
the Economic Development Authority Special Revenue Fund, due to a transfer of $607,224 of unspent
project funding from the HRA Construction Capital Project Fund. The $343,773 decrease in assigned
fund balance was mainly due to capital improvement spending in the nonmajor Park Infrastructure Capital
Project Fund, which reduced fund balances assigned for park improvements by $566,002.
in
GOVERNMENTAL FUNDS REVENUE
The following table presents the per capita revenue of the City's governmental funds for the past three
years, along with state -wide averages.
We have included the most recent comparative state -wide averages available from the Office of the State
Auditor to provide a benchmark for interpreting your City's data. The amounts received from the typical
major sources of governmental fund revenue will naturally vary between cities based on factors such as
the City's stage of development, location, size and density of its population, property values, services it
provides, and other attributes. It will also differ from year -to -year due to the effect of inflation and
changes in the City's operation. 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.
In total, the City's governmental fund revenues for 2012 were $14,614,591, a decrease of $569,373
(3.7 percent) from the prior year. On a per capita basis, the City received $714 in governmental fund
revenue for 2012, a decrease of $27 from the prior year. Revenue from property taxes increased $21 per
capita, mainly due to the elimination of the market value homestead credit (MVHC) program, through
which a portion of the City's levy was received as state aid in previous years. Intergovernmental revenue
declined $36 per capita, mainly due to a decrease of about $870,000 in state and federal aid received for
street improvements. Other revenue decreased $12 per capita, mainly due to a decline of almost $242,000
in investment income.
in
Governmental Funds Revenue per Capita
With State -Wide Averages by Population
Class
State -Wide
City of New Hope
Year
December 31, 2011
2010
2011
2012
Population
10,000- 20,000 20,000- 100,000
20,339
20,486
20,486
Property taxes
$ 363 $
406
$ 427
$ 428
$ 449
Tax increments
48
51
69
68
66
Franchise and other taxes
36
30
21
21
21
Special assessments
56
56
13
8
15
Licenses and permits
21
31
12
18
12
Intergovernmental revenues
263
152
87
78
42
Charges for services
79
78
67
75
76
Other
75
65
35
45
33
Total revenue
$ 941 $
869
$ 731
$ 741
$ 714
In total, the City's governmental fund revenues for 2012 were $14,614,591, a decrease of $569,373
(3.7 percent) from the prior year. On a per capita basis, the City received $714 in governmental fund
revenue for 2012, a decrease of $27 from the prior year. Revenue from property taxes increased $21 per
capita, mainly due to the elimination of the market value homestead credit (MVHC) program, through
which a portion of the City's levy was received as state aid in previous years. Intergovernmental revenue
declined $36 per capita, mainly due to a decrease of about $870,000 in state and federal aid received for
street improvements. Other revenue decreased $12 per capita, mainly due to a decline of almost $242,000
in investment income.
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 $19,000,158 for 2012, an increase of $43,855
(0.2 percent) from the prior year. Current expenditures were consistent from year -to -year, with a $9 per
capita increase spread across all departments. Capital outlay expenditures were $24 higher per capita in
2012, with almost $4.7 million spent on the acquisition and rehabilitation on the old "K -Mart site," offset
by decreases in street and energy conservation projects. Scheduled debt service payments were $32 per
capita lower than last year.
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Governmental Funds Expenditures per Capita
With State -Wide Averages by Population Class
State -Wide
City of New Hope
Year
December 31, 2011
2010
2011
2012
Population
10,000- 20,000 20,000 - 100,000
20,339
20,486
20,486
Current
General government
$ 99 $
82
$ 93
$ 76
$
77
Public safety
225
238
285
290
290
Public works
108
89
49
53
58
Culture and recreation
96
87
79
76
78
All other
81
82
9
14
15
$ 609 $
578
$ 515
$ 509
$
518
Capital outlay
and construction
$ 272 $
233
$ 128
$ 351
$
375
Debt service
Principal
$ 148 $
109
$ 25
$ 49
$
16
Interest and fiscal
48
41
13
17
18
$ 196 $
150
$ 38
$ 66
$
34
The City's total governmental funds expenditures were $19,000,158 for 2012, an increase of $43,855
(0.2 percent) from the prior year. Current expenditures were consistent from year -to -year, with a $9 per
capita increase spread across all departments. Capital outlay expenditures were $24 higher per capita in
2012, with almost $4.7 million spent on the acquisition and rehabilitation on the old "K -Mart site," offset
by decreases in street and energy conservation projects. Scheduled debt service payments were $32 per
capita lower than last year.
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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
2008 2009 2010 2011 2012
� Fund Balance o Cash Balance Expenditures and Operating Transfers Out
The City's General Fund cash and investment balance at December 31, 2012 was $5,043,417, an increase
of $220,410 from last year. The General Fund total fund balance at December 31, 2012 was $5,095,737,
which was an increase of $160,525 from the previous year, as compared to a budget that projected no
change in fund balance. Unassigned fund balance at year -end was $5,080,812, which represents
approximately 49.4 percent of annual expenditures and transfers out based on 2012 levels. By
comparison, unassigned fund balance at the end of the previous year represented 49.9 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 73 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 2012 compared to budget:
Property Taxes
Franchise Taxes
Licenses and Permits
Intergovemmental
Charges for Services
Fines
Other
General Fund Revenue
Budget to Actual
Millions
$— $1 $2 $3 $4 S5 $6 $7 $8
■ Budget ■ Actual
Total General Fund revenue for 2012 was $10,214,757, which was $176,894 (1.7 percent) higher than the
final budget. Intergovernmental revenue was over budget by $98,147, due to the City receiving a small
amount of LGA and several other small grants that were not budgeted. Charges for services were over
budget by $142,932, mainly due to higher than anticipated recreation program revenues.
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
Property Taxes Intergovemmental Other
■ 2008 ❑ 2009 ■ 2010 ■ 2011 ■ 2012
Total General Fund revenue for 2012 was $342,235 (3.5 percent) higher than the prior year. Property tax
revenue was $462,439 higher than the prior year, despite the City's tax levy being the same for both
years. The increase was due to the previously discussed elimination of the MVHC program, and reduced
delinquencies. Intergovernmental revenue decreased $39,299, due to the City receiving less
miscellaneous state and federal grants than last year. Revenues from other sources were $80,905 lower
than the prior year, mainly due to a $134,783 decrease in revenue from licenses and permits.
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The following graphs illustrate the components of General Fund spending for 2012 compared to budget:
General Government
Public Safety
Public Works
General Fund Expenditures
Budget to Actual
Millions
$— $1 $2 $3 $4 $5 $6 $7
Culture and Recreation
■ Budget ■ Actual
Total General Fund expenditures for 2012 were $10,183,196, which was $129,667 (1.3 percent) under the
final budget. Public safety expenditures were $77,941 under budget, primarily due to police salaries and
benefits not increasing as much as anticipated. Culture and recreation expenditures were under budget by
$56,710, mainly in parks department salaries and swimming pool 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,
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
■ 2008 112009 ■ 2010 ■ 2011 ■ 2012
Total General Fund expenditures increased by $313,062 (3.2 percent) from the previous year, with the
increase spread across all departments. General government expenditures increased $53,805, mainly due
to increased election costs. Public safety expenditures increase $102,125, primarily due to higher capital
outlay costs. Public works expenditures were $114,020 higher than last year, mainly due to higher
salaries and supply costs for street maintenance, and higher tree removal costs. Finally, culture and
recreation expenditures were $43,112 higher than last year, primarily in parks department salaries and
other costs.
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General Government Public Safety Public Works Culture and Recreation
ENTERPRISE FUNDS OVERVIEW
The City maintains a number of enterprise funds to account for services the City provides that are
financed primarily through fees charged to those utilizing the service. This section of the report provides
you with an overview of the financial trends and activities of the City's enterprise funds.
ENTERPRISE FUNDS FINANCIAL POSITION
The following table summarizes the changes in the net position of the City's enterprise funds during the
year ended December 31, 2012, presented both by classification and by fund:
Enterprise Funds Change in Financial Position
Net Position
As of Dece 31, Increase
2011 (Restated) (Decrease)
?n»
Net position of enterprise funds
Total by classification
Net investment in capital assets
Restricted
Unrestricted
Total — enterprise funds
$ 12,843,624 $ 11,114,666 $ 1,728,958
150,000 — 150,000
3,530,929 4,637,654 (1,106,725)
$ 16,524,553 $ 15,752,320 $ 772,233
Total by fund
Sewer Utility
$ 2,264,482
$ 2,118,638 $
145,844
Water Utility
4,721,819
4,759,858
(38,039)
Golf Course
387,948
362,615
25,333
Ice Arena
3,697,902
3,690,682
7,220
Storm Water
5,251,610
4,642,845
608,765
Street Lighting
200,792
177,682
23,110
Total — enterprise funds
$ 16,524,553 $ 15,752,320 $ 772,233
In total, the net position of the City's enterprise funds increased by $772,233 during the year ended
December 31, 2012. The net investment in enterprise capital assets increased $1,728,958, with the largest
factor being significant capital asset additions in the Ice Arena Fund. The $150,000 restricted net position
represents cash required to be restricted for the future payment of the City's energy conservation lease
revenue bonds. Unrestricted net position declined by $1,106,725, with the largest decreases in the Water
Utility and Ice Arena Funds, due to available funding being used for capital improvements.
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SEWER UTILTI'Y FUND
The following graph presents five years of operating results for the City's sewer utility operation.
Information for the fiscal years 2008 and 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
2008 2009 2010 2011 2012
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Sewer Utility Fund ended 2012 with a total net position of $2,264,482, of which $1,829,343
represents the net investment in sewer collection system capital assets, and $435,139 is unrestricted. Net
position increased in the current year by $145,844.
Operating revenue in the Sewer Utility Fund for 2012 was $2,376,021, an increase of $23,386
(1.0 percent) from the previous year.
Operating costs for 2012 were $2,187,204, an increase of $189,901 (9.5 percent) from the prior year,
mainly due to a $165,322 increase in disposal charges paid to Metropolitan Council Environmental
Services.
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WATER UTIL ITY FUND
The following graph presents five years of operating results for the City's water utility operation.
Information for the fiscal years 2008 and 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,
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$(500,000)
f►.IIII�:�AZI1:�.III Q�.IIj f �.II] f►.l
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Water Utility Fund ended 2012 with a total net position of $4,721,819, of which $3,805,748
represents the net investment in water distribution system capital assets, and $916,071 is unrestricted.
Water Utility Fund net assets decreased $38,039 in 2012.
Operating revenue in the Water Utility Fund for 2012 was $3,532,349, an increase of $402,038
(12.8 percent) from the previous year, due primarily to higher usage for irrigation during a long, hot
summer, and an increase in water rates.
Operating costs for 2012 were $3,586,341, an increase of $209,766 (6.2 percent) from the prior year. The
largest increases were in water purchases ($106,812), and supplies for system maintenance ($141,521).
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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,
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$ 50,000
$(50,000)
2008 2009 2010 2011 2012
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Golf Course Fund ended 2012 with a total net position of $387,948, an increase of $25,333 from the
prior year. Of this, $680,001 represents the net investment in golf course capital assets, leaving a
($292,053) deficit in unrestricted net position.
Golf Course Fund operating revenue for 2012 was $289,448, an increase of $16,384 (6.0 percent), which
is attributable to an increase in the number of rounds played due to favorable weather.
Operating expenses were $288,457, which was a decrease of $24,807 (7.9 percent) from the prior year,
mainly due to lower full -time salaries and benefits.
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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)
2008 2009 2010 2011 2012
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Ice Arena Fund ended 2012 with a total net position of $3,697,902, an increase of $7,220 from the
prior year. Of this, $3,406,888 represents the net investment in arena capital assets, $150,000 is restricted
for debt service, and $141,014 is unrestricted.
Ice Arena Fund operating revenue for 2012 was $694,702, a decrease of $57,969 (7.7 percent) from the
prior year, as ice -time rentals to both area school districts and hockey associations were down compared
to last year.
Operating expenses were $713,020, which was $20,862 (2.8 percent) lower than the prior year. The
decrease was mainly in utility costs, which were $51,660 lower than the prior year due to energy
conservation improvements completed over the last two years.
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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
2008 2009 2010 2011 2012
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Storm Water Fund ended 2012 with a total net position of $5,251,610, an increase of $608,765 from
the prior year. Of this, $3,121,644 represents the net investment in storm water collection system capital
assets, leaving $2,129,966 in unrestricted net position.
Storm Water Fund operating revenues for 2012 were $948,650, an increase of $1,619 (0.2 percent) from
the previous year.
Operating expenses were $375,989, a decrease of $33,226 (8.1 percent), mainly in repair costs.
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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
2008 2009 2010 2011 2012
o Operating Revenue
Operating Expenses
Operating Income (Loss)
The Street Lighting Fund ended 2012 with an unrestricted net position of $200,792, an increase of
$23,110 from the prior year.
Street Lighting Fund operating revenues for 2012 were $124,397, an increase of $1,655 (1.3 percent)
from the previous year.
Operating expenses were $104,721, which was $9,032 (7.9 percent) lower than the previous year due
primarily to a decrease in electric utility costs.
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GOVERNMENT -WIDE FINANCIAL STATEMENTS
In addition to fund -based information, the current reporting model for governmental entities also requires
the inclusion of two government -wide financial statements designed to present a clear picture of the City
as a single, unified entity. These government -wide statements provide information on the total cost of
delivering services, including capital assets and long -term liabilities.
STATEMENT OF NET POSITION
The Statement of Net Position essentially tells you what your city owns and owes at a given point in time,
the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to
use for providing services after its debts are settled. However, those resources are not always in
spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net
position is divided into three components: net investment capital assets, restricted, and unrestricted.
The following table presents the components of the City's net position as of December 31, 2012 and 2011
for governmental activities and business -type activities:
As of December 31, Increase
2012 2011 (Restated) (Decrease)
Net position
Governmental activities
Net investment in capital assets
Restricted
Unrestricted
Total governmental activities
Business -type activities
Net investment in capital assets
Restricted
Unrestricted
Total business -type activities
Total net position
$ 26,793,142 $ 20,628,143 $ 6,164,999
1,619,696 6,018,734 (4,399,038)
22,746,207 21,845,278 900,929
51,159,045 48,492,155 2,666,890
12,843,624
150,000
2,735,144
15,728,768
11,114,666 1,728,958
— 150,000
3,978,803 (1,243,659)
15,093,469 635,299
$ 66,887,813 $ 63,585,624 $ 3,302,189
The City's total net assets at December 31, 2012 were $3,302,189 higher than the beginning of the year.
Governmental activities net assets increased $2,666,890 in total, mainly due to capital asset additions in
excess of depreciation and an increase in the City's investment in the West Metro Fire Rescue District
joint venture. Business -type net assets increased $635,299, mainly due to positive operating results in the
Sewer Utility and Storm Water Utility Funds.
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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 position. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund -based financial statements. This statement includes the
cost of supplies used, depreciation of long -lived capital assets, and other accrual -based expenses.
The following table presents the change in net position of the City for the years ended December 31, 2012
and 2011:
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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2012
2011 (Restated)
Program
Expenses
Revenues
Net Change
Net Change
Net (expense) revenue
Governmental activities
General government
$ 1,931,318
$ 559,389 $
(1,371,929)
$ (1,397,588)
Public safety
6,062,362
2,047,310
(4,015,052)
(5,005,164)
Public works
2,126,043
633,941
(1,492,102)
(302,367)
Culture and recreation
1,928,591
674,364
(1,254,227)
(1,236,718)
Economic development
762,202
441,953
(320,249)
(300,288)
Interest on long -term debt
407,744
—
(407,744)
(236,827)
Business -type activities
Sewer utility
2,220,438
2,376,021
155,583
284,353
Water utility
3,682,602
3,614,118
(68,484)
(326,177)
Golf course
298,555
296,316
(2,239)
(43,891)
Ice arena
771,628
771,376
(252)
(88,437)
Storm water
425,112
967,714
542,602
561,740
Street lighting
104,721
124,397
19,676
8,989
Total net (expense) revenue
$ 20,721,316
$ 12,506,899
(8,214,417)
(8,082,375)
General revenues
Property taxes and tax increments
10,472,495
10,185,111
Franchise taxes
440,149
439,795
Unrestricted grants and contributions
47,662
87,206
Unrestricted investment earnings
486,979
816,573
Gain on disposal of assets
69,321
13,568
Total general revenues
11,516,606
11,542,253
Change in net position
S
3,302,189
S 3,459,878
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 N0.61— 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. 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 N0.67 - FINANCIAL REPORTING FOR PENSION PLANS - AN AMENDMENT OF
GASB STATEMENT NOS. 25 AND 50
The primary objective of this statement is to improve financial reporting by state and local government
pension plans. GASB Statement No. 67 replaces the requirements of GASB Statement Nos. 25 and 50
for pension plans that are administered through trusts or equivalent arrangements that meet the following
criteria: contributions from employers and nonemployer contributing entities to the pension plan and
earnings on those contributions are irrevocable; pension plan assets are dedicated to providing pensions to
plan members in accordance with the benefit terms; and pension plan assets are legally protected from the
creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan
is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan
members. The requirements of GASB Statement Nos. 25 and 50 remain applicable to pension plans that
are not administered through trusts covered by the scope of this statement and to defined contribution
plans that provide post- employment benefits other than pensions. The statement makes a number of
changes in the financial statement presentation, measurement, and required disclosures relating to the
reporting of these types of pension plans. This statement is effective for financial statements for fiscal
years beginning after June 15, 2013. Earlier application is encouraged.
GASB STATEMENT N0.68 - ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS - AN
AMENDMENT OF GASB STATEMENT NOS. 27 AND 50
The primary objective of this statement is to improve accounting and financial reporting by state and local
governments for pensions. This statement replaces the requirements of GASB Statement Nos. 27 and 50,
as they relate to pensions that are provided through pension plans administered as trusts or equivalent
arrangements that meet certain criteria (as described earlier for GASB Statement No. 67). The
requirements of GASB Statement Nos. 27 and 50 remain applicable for pensions that are not covered by
the scope of this statement.
This statement establishes standards for measuring and recognizing liabilities, deferred outflows of
resources, deferred inflows of resources, and expense /expenditures. In addition, this statement details the
recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit
pension plan and for employers whose employees are provided with defined contribution pensions. This
statement also addresses circumstances in which a nonemployer entity has a legal requirement to make
contributions directly to a pension plan. This statement is effective for financial statements for fiscal
years beginning after June 15, 2014. Earlier application is encouraged.
-23-
Included in this statement are major changes in how employers that participate in cost - sharing pension
plans, such as TRA and PERA, account for pension benefit expenses and liabilities. In financial
statements prepared using the economic resources measurement focus and accrual basis of accounting
(government -wide and proprietary funds), a cost - sharing employer that does not have a special funding
situation is required to recognize a liability for its proportionate share of the net pension liability of all
employers with benefits provided through the pension plan. A cost - sharing employer is required to
recognize pension expense and report deferred outflows of resources and deferred inflows of resources
related to pensions for its proportionate share of collective pension expense and collective deferred
outflows of resources and deferred inflows of resources related to pensions. In addition, the effects of
(1) a change in the employer's proportion of the collective net pension liability and (2) differences during
the measurement period between the employer's contributions and its proportionate share of the total of
contributions from employers included in the collective net pension liability are required to be
determined. These effects are required to be recognized in the employer's pension expense in a
systematic and rational manner over a closed period equal to the average of the expected remaining
service lives of all active and inactive employees that are provided with pensions through the pension
plan.
GASB STATEMENT N0.69 - GOVERNMENT COMBINATIONS AND DISPOSALS OF GOVERNMENT
OPERATIONS
This statement provides accounting and financial reporting guidance, including disclosure requirements,
for government combinations and disposals of government operations. Government combinations
include mergers, acquisitions, and transfers of operations. Included within the scope of this statement are
combinations of governmental entities or combinations of governmental entities, with nongovernmental
entities (such as a nonprofit entity) as long as the new or continuing organization is a government. This
statement does not apply to combinations in which a government acquires an organization that continues
to exist as a separate entity, or acquires an equity interest in an organization that remains legally separate
from the acquiring government. A disposal of operations occurs when a government either transfers or
sells specific operations. The provisions of this statement are effective for financial statements for
periods beginning after December 15, 2013. Earlier application is encouraged.
PROPOSED CHANGES TO REQUIREMENTS FOR FEDERAL GRANTS
The U.S. Office of Management and Budget (OMB) has issued for comment Proposed OMB Uniform
Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards, which proposes
broad revisions to OMB Circular A -133 and other key grant reforms. The proposed guidance includes a
number of significant changes to the federal Single Audit process, including; an increase in dollar
threshold for requiring a Single Audit, changes to the process for determining major programs, a
reduction in the percentage of expenditures required to be covered by a Single Audit, revised criteria for
determining low -risk auditees, a reduction in the types of compliance requirements to be tested, and an
increase in the threshold for reporting questioned costs. The proposed guidance would also consolidate
OMB circulars and cost principles; and change certain federal requirements related to indirect costs, time
and effort reporting, and grant administration.
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