2017 Management Report
Management Report
for
City of New Hope, Minnesota
December 31, 2017
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C ERTIFIED
A CCOUNTANTS
P UBLIC
PRINCIPALS
Thomas A. Karnowski, CPA
Paul A. Radosevich, CPA
William J. Lauer, CPA
James H. Eichten, CPA
Aaron J. Nielsen, CPA
Victoria L. Holinka, CPA/CMA
Malloy, Montague, Karnowski, Radosevich & Co., P.A.
5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com
To the City Council and Management
City of New Hope, Minnesota
We have prepared this management report in conjunction with our audit of the City of New Hope,
Minnesota’s (the City) financial statements for the year ended December 31, 2017. We have organized
this report into the following sections:
• Audit Summary
• Governmental Funds Overview
• Enterprise Funds Overview
• Government-Wide Financial Statements
• Legislative Updates
• Accounting and Auditing Updates
We would be pleased to further discuss any of the information contained in this report or any other
concerns that you would like us to address. We would also like to express our thanks for the courtesy and
assistance extended to us during the course of our audit.
The purpose of this report is solely to provide those charged with governance of the City, management,
and those who have responsibility for oversight of the financial reporting process comments resulting
from our audit process and information relevant to city finances in Minnesota . Accordingly, this report is
not suitable for any other purpose.
Minneapolis, Minnesota
May 14, 2018
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AUDIT SUMMARY
The following is a summary of our audit work, key conclusions, and other information that we consider
important or that is required to be communicated to the City Council, administration, or those charged
with governance of the City.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS
We have audited the financial statements of the governmental activities, the business -type activities, each
major fund, and the aggregate remaining fund information of the City as of and for the year ended
December 31, 2017, and the related notes to the financial statements. 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, 2017:
• We issued an unmodified opinion on the City’s basic financial statements.
• We reported no deficiencies in the City’s internal control over financial reporting 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.
FOLLOW-UP ON PRIOR YEAR FINDINGS AND RECOMMENDATIONS
As a part of our audit of the City’s financial statements for the year ended December 31, 2017, we
performed procedures to follow-up on the findings and recommendations that resulted from our prior year
audit. We reported the following finding that was corrected by the City in the current year:
• In 2016, 2 of 25 disbursements tested were not paid within the statutorily required time period of
35 days from the receipt of goods or services. Based on our testing for 2017, there was no similar
finding in the current year.
SIGNIFICANT ACCOUNTING POLICIES
Management is responsible for the selection and use of appropriate accounting policies. The si gnificant
accounting policies used by the City are described in Note 1 of the notes to basic financial statements.
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No new accounting policies were adopted and the application of existing policies was not changed during
the year ended December 31, 2017; however, the City implemented the following governmental
accounting standards during the fiscal year:
• Governmental Accounting Standards Board (GASB) Statement No. 79, Certain External
Investment Pools and Pool Participants, which enhanced disclosures regarding investments.
• GASB Statement No. 82, Pension Issues, an amendment of GASB Statements No. 67, No. 68, and
No. 73, which addressed certain issues related to pension reporting and disclosures.
We noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in the
proper period.
ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management’s knowledge and experience about past and current events and assumptions about
future events. Certain accounting estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting them may diffe r
significantly from those expected. The most sensitive estimates affecting the financial statements were:
• Value of Land Held for Resale – These assets are stated at the lower of cost or acquisition value
based on management’s estimates.
• Depreciation – Management’s estimates of depreciation expense are based on the estimated
useful lives of the assets.
• Compensated Absences – Management’s estimate is based on current rates of pay; vacation,
wellness, personal, and sick leave balances; and the likelihood that accrued sick leave will
ultimately be paid at termination.
• Other Post-Employment Benefit (OPEB) and Pension Liabilities – The City has recorded
liabilities and activity for other post-employment benefits (OPEB) and pension benefits. These
obligations are calculated using actuarial methodologies described in GASB Statement Nos. 45
and 68. These actuarial calculations include significant assumptions, including projected changes,
healthcare insurance costs, investment returns, retirement ages, proportionate share, and
employee turnover.
We evaluated the key factors and assumptions used by management in the areas discussed on the previous
page 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.
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.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
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DISAGREEMENTS WITH MANAGEMENT
For purposes of this report, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditor’s report. We are pleased to report that no such disagreements arose during the
course of our audit.
MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 14, 2018.
MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a “second opinion” on certain situations . If a consultation involves
application of an accounting principle to the City’s financial statements or a determination of the type of
auditor’s opinion that may be expressed on those statements, our professional standards require the
consulting accountant to check with us to determine that the consultant has all the relevant facts . To our
knowledge, there were no such consultations with other accountants.
OTHER AUDIT FINDINGS OR ISSUES
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City’s auditors . However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
OTHER MATTERS
We applied certain limited procedures to the management’s discussion and analysis (MD&A) and the
pension and OPEB-related required supplementary information (RSI) that supplements the basic financial
statements. Our procedures consisted of inquiries of management regarding the methods of preparing the
information and comparing the information for consistency with management’s responses to our
inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic
financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on
the RSI.
We were engaged to report on the combining and individual fund financial statements and schedules
accompanying the financial statements, which are not RSI. With respect to this supplementary
information, we made certain inquiries of management and evaluated the form, content, and methods of
preparing the information to determine that the information complies with accounting principles generally
accepted in the United States of America, the method of preparing it has not changed from the prio r
period, and the information is appropriate and complete in relation to our audit of the financial statements.
We compared and reconciled the supplementary information to the underlying accounting records used to
prepare the financial statements or to the financial statements themselves.
We were not engaged to report on the introductory and statistical sections, which accompany the financial
statements, but are not RSI. Such information has not been subjected to the auditing procedures applied in
the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any
assurance on it.
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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, special revenue, debt service, and capital project funds .
These funds are used to account for the basic services the City provides to all of its citizens, which are
financed primarily with property taxes. The governmental fund information in the City’s financial
statements focuses on budgetary compliance and the sufficiency of each governmental fund’s current
assets to finance its current liabilities.
PROPERTY TAXES
Minnesota cities rely heavily on local property tax levies to support their governmental fund activities.
For the 2016 fiscal year, local ad valorem property tax levies provided 39.8 percent of the total
governmental fund revenues for cities over 2,500 in population, and 36.4 percent for cities under 2,500 in
population.
The total market value of property in Minnesota cities increased about 5.6 percent for the 2017 levy year,
which followed an increase of 5.7 percent for levy year 2016. T he market values used for levying
property taxes are based on the previous fiscal year (e.g., market values for taxes levied in 2017 were
based on assessed values as of January 1, 2016), so the trend of change in these market values lags
somewhat behind the housing market and economy in general.
The City’s taxable market value increased 7.2 percent for taxes payable in 2016 and 7.3 percent for taxes
payable in 2017. The following graph shows the City’s changes in taxable market value over the past
10 years:
$–
$300,000,000
$600,000,000
$900,000,000
$1,200,000,000
$1,500,000,000
$1,800,000,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Taxable Market Value
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Tax capacity is considered the actual base available for taxation. It is calculated by applying the state’s
property classification system to each property’s market value . Each property classification, such as
commercial or residential, has a different calculation and uses different rates. Consequently, a city’s total
tax capacity will change at a different rate than its total market value, as tax capacity is affected by the
proportion of its tax base that is in each property classification from year-to-year, as well as legislative
changes to tax rates. The City’s tax capacity increased 7.5 percent for taxes payable in 2016 and
7.3 percent for taxes payable in 2017.
The following graph shows the City’s change in tax capacities over the past 10 years:
$–
$3,000,000
$6,000,000
$9,000,000
$12,000,000
$15,000,000
$18,000,000
$21,000,000
$24,000,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Local Tax Capacity
The following table presents the average tax rates applied to city residents for each of the last three levy
years, along with comparative state-wide and metro area average rates from the two most recent years for
which the information is available:
2015 2016 2015 2016 2015 2016 2017
Average tax rate
City 46.9 46.5 43.4 43.0 56.0 57.4 59.9
County 44.7 44.1 42.9 42.3 46.4 45.4 44.1
School 27.1 27.5 28.3 28.6 33.2 33.8 31.6
Special taxing 6.9 6.9 8.8 8.7 10.6 10.4 10.2
Total 125.6 125.0 123.4 122.6 146.2 147.0 145.8
Note: State-wide and metro area average tax rates are not available for 2017.
Rates Expressed as a Percentage of Net Tax Capacity
City of New HopeMetro Area
Seven-CountyAll Cities
State-Wide
The City’s portion of the tax rate has been higher than average in recent years due to the City’s practice of
utilizing annual levies rather than special assessment bonds to finance street and park improvements.
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GOVERNMENTAL FUND BALANCES
The following table summarizes the changes in the fund balances of the City’s governmental funds during
the year ended December 31, 2017, presented both by fund balance classification and by fund:
Increase
2017 2016 (Decrease)
Fund balances of governmental funds
Total by classification
Nonspendable 17,617$ 18,242$ (625)$
Restricted 24,605,109 7,772,782 16,832,327
Committed 5,837,809 5,397,075 440,734
Assigned 5,176,318 4,958,094 218,224
Unassigned 2,692,354 3,240,121 (547,767)
Total – governmental funds 38,329,207$ 21,386,314$ 16,942,893$
Total by fund
General 6,888,655$ 6,273,678$ 614,977$
Economic Development Authority Special Revenue 5,634,105 5,198,723 435,382
HRA Construction Capital Projects 4,932,405 4,581,670 350,735
City Hall CIP Capital Projects 18,764,085 363,290 18,400,795
Street Infrastructure Capital Projects (1,867,156) (2,274,312) 407,156
2017 Street Improvement Project Capital Projects 41,864 2,873,440 (2,831,576)
HRA Bonds Debt Service (2,303,670) (330,252) (1,973,418)
Nonmajor funds 6,238,919 4,700,077 1,538,842
Total – governmental funds 38,329,207$ 21,386,314$ 16,942,893$
as of December 31,
Governmental Funds Change in Fund Balance
Fund Balance
In total, the fund balances of the City’s governmental funds increased by $16,942,893 during the year
ended December 31, 2017.
The increase in restricted fund balances was due to the issuance of the 2017A General Obligation Capital
Improvement Bonds, the proceeds of which were placed in the City Hall CIP Capital Projects Fund for
construction of a new police station and city hall facility.
The deficit fund balance in the Street Infrastructure Capital Projects Fund was caused by spending for the
street improvement capital projects, which was partially funded with advances of future year’s state MSA
street construction grant dollars. The improvement in the current year reflects recognizing the 2017
entitlement.
The decrease in the fund balance of the 2017 Street Improvement Project Capital Projects Fund reflects
the spend down of proceeds from the City’s 2016A Street Reconstruction Bonds for the related projects ,
along with transfers to cover excess costs from the Xylon Avenue Improvement and 2016 Street
Improvement Project Capital Projects Funds.
The decrease in the fund balance of the HRA Bonds Debt Service Fund was mainly due to transfers out to
the HRA Construction Capital Projects Fund for tax increment financed project costs.
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GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES
The following table presents the per capita revenue of the City’s governmental funds for the past
three years, along with state-wide averages.
We have included the most recent comparative state-wide averages available from the Office of the State
Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical
major sources of governmental fund revenue will naturally vary between cities based on factors such as a
city’s stage of development, location, size and density of its population, property values, services it
provides, and other attributes. It will also differ from year-to-year due to the effect of inflation and
changes in its operation. Also, certain data on these tables may be classified differently than how they
appear in the City’s financial statements in order to be more comparable to the state-wide information,
particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report 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 MD&A. An inherent difficulty in
presenting per capita information is the accuracy of the population count, which for most years is based
on estimates.
Year 2015 2016 2017
Population 10,000–20,000 20,000-100,000 21,225 21,600 21,600
Property taxes 432$ 455$ 478$ 503$ 554$
Tax increments 26 42 20 23 39
Franchise and other taxes 43 45 21 21 42
Special assessments 44 59 2 8 4
Licenses and permits 33 42 18 22 30
Intergovernmental revenues 275 152 64 96 85
Charges for services 92 103 75 73 80
Other 57 54 34 25 39
Total revenue 1,002$ 952$ 712$ 771$ 873$
Governmental Funds Revenue per Capita
With State-Wide Averages by Population Class
City of New HopeState-Wide
December 31, 2016
In total, the City’s governmental fund revenues for 2017 were $18,855,003, an increase of $2,232,821
(13.4 percent) from the prior year. On a per capita basis, the City received $102 more per capita
governmental fund revenue for 2017 than the prior year. Property tax revenue was $51 per capita higher
than last year, due to an increase in the City’s levy. Revenue from tax increments was $16 per capita
higher than last year, as it was the first year the City collected tax increments from its new Compasse
Pointe and City Center TIF Districts. Revenue from franchise and other taxes was $21 per capita higher
than last year, due to an increase in franchise tax rates.
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The expenditures of governmental funds will also vary from state -wide averages and from year-to-year,
based on the City’s circumstances. Expenditures are classified into three types as follows:
• Current – These are typically the general operating type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
• Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year-to-year. Many of these expenditures are
project-oriented, and are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
• Debt Service – Although the expenditures for debt service may be relatively consistent over the
term of the respective debt, the funding source is the important factor . Some debt may be repaid
through specific sources such as special assessments or redevelopment funding, while other debt
may be repaid with general property taxes.
The City’s expenditures per capita of its governmental funds for the past three years, together with
state-wide averages, are presented in the following table:
Year 2015 2016 2017
Population 10,000–20,000 20,000-100,000 21,225 21,600 21,600
Current
114$ 97$ 80$ 87$ 121$
250 273 323 332 358
123 95 63 74 77
109 95 87 90 96
77 91 23 27 80
673 651 576 610 732
Capital outlay
and construction 370 301 387 381 242
Debt service
163 115 19 19 24
38 34 12 15 33
201 149 31 34 57
Total expenditures 1,244$ 1,101$ 994$ 1,025$ 1,031$
Governmental Funds Expenditures per Capita
With State-Wide Averages by Population Class
City of New Hope
All other
State-Wide
December 31, 2016
Principal
Interest and fiscal
General government
Public safety
Public works
Culture and recreation
The City’s total governmental funds expenditures were $22,271,604 for 2017, an increase of $146,586
(0.7 percent) from the prior year, or $6 per capita. Current expenditures were $122 per capita higher than
last year, with the increase mainly in the general government ($34 per capita), public safety ($26 per
capita) and other (primarily community development – $53 per capita). Capital outlay expenditures
declined by $139 per capita from last year, due to a decrease in street improvement project activity.
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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 parks and
recreation. The graph below illustrates the change in the General Fund financial position over the last
five years. We have also included a line representing annual expenditures and transfers out to reflect the
change in the size of the General Fund operation over the same period.
2013 2014 2015 2016 2017
Fund Balance $5,583,417 $5,821,294 $6,080,412 $6,273,678 $6,888,655
Cash Balance (Net)$5,505,946 $5,763,629 $5,919,870 $6,090,997 $6,750,104
Exp & Trans Out $10,490,040 $11,329,709 $11,879,622 $12,624,250 $13,290,729
$–
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
General Fund Financial Position
Year Ended December 31,
The total fund balance of the City’s General Fund increased $614,977 in 2017, as compared to a
breakeven budget. Unassigned fund balance was $6,871,038 at the end of 2017 fiscal year, which
represents approximately 51.7 percent of annual expenditures and transfers out based on 2017 levels.
As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels
as the volume of financial activity has grown. This is an important factor because a government, like any
organization, requires a certain amount of equity to operate. A healthy financial position allows the City
to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the
adequate and consistent funding of services, repairs, and unexpected costs; and is a factor in determining
the City’s bond rating and resulting interest costs. Maintaining an adequate fund balance has become
increasingly important given the fluctuations 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, st reet
maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Property
taxes comprise about 70 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 graph reflects the City’s General Fund revenue sources for 2017 compared to budget:
$– $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
Property Taxes
Franchise Taxes
Licenses and Permits
Intergovernmental
Charges for Services
Fines
Other
Millions
General Fund Revenue
Budget to Actual
Budget Actual Total General Fund revenue for 2017 was $13,586,946, which was $340,230 (2.6 percent) higher than the
final budget. Revenue from licenses and permits was $194,540 over budget, due to more building activity
than anticipated. Intergovernmental revenue exceeded budget by $83,671, due to a number of small state
and local grants. Revenues from charges for services was $101,659 over budget, mainly in inspection fees
and other building-related charges.
The following graph presents the City’s General Fund revenues by source for the last five years . The
graph reflects the City’s reliance on property taxes and other local sources of revenue.
Property Taxes Intergovernmental Other
2013 $7,803,838 $526,909 $2,387,611
2014 $7,928,813 $696,731 $2,522,581
2015 $8,308,447 $1,133,965 $2,472,328
2016 $8,954,626 $1,170,180 $2,457,510
2017 $9,541,667 $1,177,400 $2,867,879
$–
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
General Fund Revenue by Source
Year Ended December 31,
Total General Fund revenue for 2017 was $1,004,630 (8.0 percent) higher than the prior year. Property
tax revenue increased $587,041 from last year, due to an increase in the adopted levy. Revenue from other
sources as shown above were $410,369 higher than the previous year, due to the increases in
building-related permits and charges for services discussed above.
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The following graph illustrates the components of General Fund spending for 2017 compared to budget:
$– $1 $2 $3 $4 $5 $6 $7 $8 $9
General Government
Public Safety
Public Works
Culture and Recreation
Millions
General Fund Expenditures
Budget to Actual
Budget Actual
Total General Fund expenditures for 2017 were $13,140,729, which was $424,747 (3.1 percent) under
budget, with the variance spread across all categories shown above. General government expenditures
were $128,608 under budget, mainly in personnel costs and purchased services for planning and zoning.
Public safety expenditures were $137,866 under budget, primarily in police salaries and benefits.
The following graph illustrates the City’s General Fund expenditures by function over the last five years:
General Government Public Safety Public Works Culture and
Recreation
2013 $1,610,118 $6,052,292 $1,038,187 $1,605,757
2014 $1,678,999 $6,642,479 $1,009,257 $1,748,974
2015 $1,686,151 $6,975,382 $1,112,092 $1,855,997
2016 $1,750,414 $7,301,852 $1,389,553 $1,932,431
2017 $1,767,879 $7,868,754 $1,435,256 $2,068,840
$–
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
General Fund Expenditures by Function
Year Ended December 31,
Total General Fund expenditures were $766,479 (6.2 percent) higher than the previous year. Public safety
expenditures were $566,902 higher, mainly in police and protective inspection costs. Expenditures for
culture and recreation increased $136,409 from the prior year, mainly in purchased services for park
maintenance.
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ENTERPRISE FUNDS OVERVIEW
The City maintains several enterprise funds to account for services the City provides that are financed
primarily through fees charged to those utilizing the service. This section of the report provides you with
an overview of the financial trends and activities of the City’s enterprise funds , which includes the Sewer
Utility, Water Utility, Golf Course, Ice Arena, Storm Water, and Street Lighting funds.
ENTERPRISE FUNDS FINANCIAL POSITION
The following table summarizes the changes in the financial position of the City’s enterprise funds during
the year ended December 31, 2017, presented both by classification and by fund:
Increase
2017 2016 (Decrease)
Net position of enterprise funds
Total by classification
Net investment in capital assets 18,663,872$ 19,286,134$ (622,262)$
Restricted 1,031,673 868,853 162,820
Unrestricted 976,652 (818,584) 1,795,236
Total – enterprise funds 20,672,197$ 19,336,403$ 1,335,794$
Total by fund
Sewer Utility 3,506,167$ 3,101,892$ 404,275$
Water Utility 5,729,102 5,029,330 699,772
Golf Course 582,399 644,161 (61,762)
Ice Arena 3,391,642 3,371,992 19,650
Storm Water 7,124,152 6,888,579 235,573
Street Lighting 338,735 300,449 38,286
Total – enterprise funds 20,672,197$ 19,336,403$ 1,335,794$
Enterprise Funds Change in Financial Position
Net Position
as of December 31,
In total, the net position of the City’s enterprise funds increased by $1,335,794 during the year ended
December 31, 2017. The net investment in enterprise capital assets decreased $622,262, primarily due to
depreciation. The $1,031,673 of restricted net position represents cash held in an escrow account in the
Ice Arena Fund for the future payment of the City’s energy conservation lease revenue bonds.
Unrestricted net position increased by $1,795,236, mainly due to positive operating results in the Sewer
and Water Utility Funds.
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SEWER UTILITY FUND
The following graph presents five years of operating results for the City’s Sewer Utility Fund:
2013 2014 2015 2016 2017
Op. Rev $2,443,094 $2,414,482 $2,468,638 $2,627,875 $2,899,257
Op. Exp.$2,279,155 $1,936,608 $2,447,426 $2,175,482 $2,420,994
Op. Inc. (Loss)$163,939 $477,874 $21,212 $452,393 $478,263
$–
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Sewer Utility Operating Results
Year Ended December 31,
The Sewer Utility Fund ended 2017 with a total net position of $3,506,167, of which $3,528,504
represents the net investment in sewer collection system capital assets, leaving an unrestricted deficit
balance of $22,337. Net position increased $404,275 in the current year.
Operating revenue in the Sewer Utility Fund for 2017 increased $271,382 (10.3 percent) from the
previous year, due to increased rates and usage during 2017.
Operating costs for 2017 were $245,512 (11.3 percent) more than last year, mainly due to increased
disposal charges paid to Metropolitan Council Environmental Services.
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WATER UTILITY FUND
The following graph presents five years of operating results for the City’s Water Utility Fund:
2013 2014 2015 2016 2017
Op. Rev $3,460,008 $3,572,291 $3,576,643 $3,835,031 $3,994,122
Op. Exp.$3,139,338 $4,554,088 $4,522,667 $3,519,233 $3,462,858
Op. Inc. (Loss)$320,670 $(981,797)$(946,024)$315,798 $531,264
$(1,000,000)
$(500,000)
$–
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
Water Utility Operating Results
Year Ended December 31,
The Water Utility Fund ended 2017 with a total net position of $5,729,102, of which $4,837,977
represents the net investment in water distribution system capital assets, leaving an unrestricted balance of
$891,125. Water Utility Fund net position increased $699,772 in 2017.
Operating revenue in the Water Utility Fund for 2017 increased $159,091 (4.1 percent) from the prior
year due to increases in both rates and consumption.
Operating costs for 2017 were $56,375 (1.6 percent) less than the prior year, due to personnel expense
and purchased services decreasing in the current year.
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GOLF COURSE FUND
The following graph presents five years of operating results for the City’s Golf Course Fund:
2013 2014 2015 2016 2017
Op. Rev $259,221 $243,497 $272,314 $299,856 $273,247
Op. Exp.$259,695 $298,222 $290,507 $338,940 $335,983
Op. Inc. (Loss)$(474)$(54,725)$(18,193)$(39,084)$(62,736)
$(100,000)
$(50,000)
$–
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Golf Course Fund
Year Ended December 31,
The Golf Course Fund ended 2017 with a total net position of $582,399, a decrease of $61,762. Of this,
$549,192 represents the net investment in golf course capital assets, leaving $33,207 in unrestricted net
position.
Golf Course Fund operating revenue for 2017 decreased $26,609 (8.9 percent) from the prior year, which
is attributable to a decrease in green fees due to a decline in the number of rounds played.
Operating expenses were $2,957 (0.9 percent) lower than the prior year.
-16-
ICE ARENA FUND
The following graph presents five years of operating results for the City’s Ice Arena Fund:
2013 2014 2015 2016 2017
Op. Rev $725,211 $775,784 $748,886 $713,649 $811,661
Op. Exp.$899,697 $809,598 $821,786 $890,144 $951,444
Op. Inc. (Loss)$(174,486)$(33,814)$(72,900)$(176,495)$(139,783)
$(200,000)
$(100,000)
$–
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Ice Arena Fund
Year Ended December 31,
The Ice Arena Fund ended 2017 with a total net position of $3,391,642, an increase of $19,650. Of this,
$2,897,887 represents the net investment in arena capital assets, and $1,031,673 is restricted for debt
service, leaving an unrestricted deficit balance of $537,918.
Ice Arena Fund operating revenue for 2017 increased $98,012 from the prior year, mainly due to a
14.2 percent increase in ice time rental revenue.
Operating expenses were $61,300 (6.9 percent) higher than the prior year, mainly due to increased
personnel expense.
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STORM WATER FUND
The following graph presents five years of operating results for the City’s Storm Water Fund:
2013 2014 2015 2016 2017
Op. Rev $963,167 $948,537 $981,723 $1,037,429 $1,082,348
Op. Exp.$731,735 $517,585 $690,536 $797,604 $834,963
Op. Inc. (Loss)$231,432 $430,952 $291,187 $239,825 $247,385
$–
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Storm Water Fund
Year Ended December 31,
The Storm Water Fund ended 2017 with a total net position of $7,124,152, an increase of $235,573. Of
this, $6,850,312 represents the net investment in storm water collection system capital assets, leaving an
unrestricted net position of $273,840.
Storm Water Fund operating revenues for 2017 increased $44,919 (4.3 percent) from the previous year,
mainly due to a rate increase implemented in 2017.
Operating expenses were $37,359 (4.7 percent) higher than last year, due to increases in personnel service
costs and depreciation.
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STREET LIGHTING FUND
The following graph presents five years of operating results for the City’s Street Lighting Fund:
2013 2014 2015 2016 2017
Op. Rev $125,604 $123,060 $128,890 $137,525 $137,491
Op. Exp.$117,518 $99,506 $105,471 $102,912 $101,625
Op. Inc. (Loss)$8,086 $23,554 $23,419 $34,613 $35,866
$–
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Street Lighting Fund
Year Ended December 31,
The Street Lighting Fund ended 2017 with an unrestricted net position of $338,735, an increase of
$38,286 from the prior year.
Street Lighting Fund operating revenue for 2017 was virtually unchanged from the prior year, decreasing
by $34.
Operating expenses were $1,287 (1.3 percent) lower than the previous year.
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GOVERNMENT-WIDE FINANCIAL STATEMENTS
In addition to fund-based information, the current reporting model for governmental entities also requires
the inclusion of two government -wide financial statements designed to present a clear picture of the City
as a single, unified entity. These government-wide financial statements provide information on the total
cost of delivering services, including capital assets and long-term liabilities.
STATEMENT OF NET POSITION
The Statement of Net Position essentially tells you what your city owns and owes at a given p oint in time,
the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to
use for providing services after its debts are settled. However, those resources are not always in spendable
form, or there may be restrictions on how some of those resources can be used. Therefore, net position is
divided into three components: net investment in capital assets, restricted, and unrestricted.
The following table presents the components of the City’s net position as of December 31, 2017 and 1899
for governmental activities and business-type activities:
Increase
2017 2016 (Decrease)
Net position
Governmental activities
Net investment in capital assets 27,747,845$ 29,951,754$ (2,203,909)$
Restricted 6,207,578 4,893,801 1,313,777
Unrestricted 12,104,041 11,081,824 1,022,217
Total governmental activities 46,059,464 45,927,379 132,085
Business-type activities
Net investment in capital assets 18,663,872 19,286,134 (622,262)
Restricted 1,031,673 868,853 162,820
Unrestricted 144,559 (1,839,376) 1,983,935
Total business-type activities 19,840,104 18,315,611 1,524,493
Total net position 65,899,568$ 64,242,990$ 1,656,578$
As of December 31,
The City’s total net position at December 31, 2017 increased $1,656,578 from the previous year-end.
Governmental activities net position increased by $132,085. The shift between the various elements of
governmental activities net position from year-to-year primarily reflects the utilization of available
resources to help finance capital improvement projects.
Business-type activities net position increased $1,524,493, as outlined in the discussion of enterprise fund
operations earlier in this report.
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STATEMENT OF ACTIVITIES
The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other
transactions that increase or reduce total net position. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund-based financial statements. This statement includes the
cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses.
The following table presents the change in net position of the City for the years ended December 31, 2017
and 2016:
2016
Program
Expenses Revenues Net Change Net Change
Governmental activities
General government 2,666,781$ 453,309$ (2,213,472)$ (1,475,591)$
Public safety 8,257,709 1,633,536 (6,624,173) (8,081,451)
Public works 2,975,007 1,548,693 (1,426,314) (2,020,262)
Culture and recreation 2,485,417 766,153 (1,719,264) (1,671,762)
Economic development 2,163,967 131,500 (2,032,467) (409,502)
Interest on long-term debt 725,982 – (725,982) (323,326)
Business-type activities
Sewer utility 2,399,248 2,899,329 500,081 572,813
Water utility 3,504,722 4,318,344 813,622 521,614
Golf course 322,278 283,393 (38,885) (26,354)
Ice arena 996,056 856,442 (139,614) (191,508)
Storm water 834,688 1,132,233 297,545 1,591,306
Street lighting 101,668 137,491 35,823 34,631
Total net (expense) revenue 27,433,523$ 14,160,423$ (13,273,100) (11,479,392)
General revenues
Property taxes and tax increments 12,770,695 11,336,286
Franchise taxes 912,357 447,248
Unrestricted grants and contributions 628,119 633,056
Unrestricted investment earnings 568,051 422,668
Gain on sale of capital assets 50,456 –
Total general revenues 14,929,678 12,839,258
Change in net position 1,656,578$ 1,359,866$
2017
Net (expense) revenue
One of the goals of this statement is to provide a side-by-side comparison to illustrate the difference in the
way the City’s governmental and business-type operations are financed. The table clearly illustrates the
dependence of the City’s governmental operations on general revenues, such as property taxes. It also
shows that, for the most part, the City’s business-type activities are generating sufficient program
revenues (service charges and program-specific grants) to cover expenses. This is critical given the
current downward pressures on the general revenue sources.
The difference in the net change in public safety from year-to-year was mainly due to the amount of the
Public Employees Retirement Association pension plan expense allocated to this function and the change
in the estimated investment in the West Metro Fire-Rescue District joint venture. The difference in the net
change in economic development year-to-year was the result of increased Housing and Redevelopment
Authority and Economic Development Authority activity, including a loss on the sale of land held for
redevelopment.
-21-
LEGISLATIVE UPDATES
The 2017 legislative session began with a full agenda, which included adopting a fiscal year 2018–2019
biennial state budget. The February 2017, state budget forecast projected that the state General Fund
would end the 2016–2017 biennium with a surplus of $743 million, eliminating the need for budget cuts
or transfers to balance the fund. However, the Legislature was expected to address several significant
spending areas for which successful funding appropriations had not been passed in recent legislative
sessions. The 2017 regular legislative session ended with four omnibus budget bills being vetoed,
potentially leaving a number of these same areas without appropriations. After a three-day special session,
the Governor and Legislature were able to agree on budget and appropriation bills addressing most of the
state budgetary needs for the upcoming biennium, albeit not without several line item vetoes invoked by
the Governor, including striking the appropriations for operating the House and Senate from the bills.
The following is a summary of recent legislation affecting Minnesota cities:
Omnibus Bonding Bill – The omnibus bonding bill authorizes financing for approximately $1.1 billion
in capital improvements. Included in the approved funding was $255 million for transportation
infrastructure, $83 million for economic development, $116 million for Public Financing Agency water
infrastructure loans and grants to municipalities, and $4 million for Metropolitan Council inflow and
infiltration improvement grants to metro area cities.
Omnibus Transportation Bill – The omnibus transportation bill appropriates $2.95 billion in fiscal 2018
and $2.87 billion in fiscal 2019, for a wide variety of transportation related projects. Included in the
appropriations are approximately $191 million and $198 million for municipal state aid street fund
purposes in fiscal 2018 and fiscal 2019, respectively.
Property Tax Relief – The omnibus tax bill contained a number of property tax relief measures,
including:
• Elimination of the implicit price deflator annual increase for the state general property tax
levy, effectively freezing it at the payable 2018 level for many property classes;
• Exempting the first $100,000 of each commercial-industrial parcel’s tax capacity from the
state general property tax levy;
• Expanding eligibility for homestead or agricultural property classification exemptions for
certain types of resort and conservation property for general property taxes; and
• Increasing the minimum value for a storage shed, deck, or similar structure on a leased
mobile home to be considered taxable from $1,000 to $10,000.
Local Government Aid – The annual appropriation for Local Government Aid (LGA) for cities was
increased $15.0 million to $534.4 million for aid payable in 2018 and thereafter, and the LGA payment
schedule was accelerated for fiscal 2019 only. Several corrections were also made to the city LGA
formula calculation, and a sparsity adjustment was incorporated for certain medium and small cities
beginning in 2018.
Minnesota Investment Fund – The omnibus jobs and economic growth bill appropriates $12.5 million
for each year of the biennium for the Minnesota Investment Fund, which is available for municipalities to
provide loans to assist with the expansion of local businesses.
Electronic Funds Transfers – Effective August 1, 2017, home rule charter cities of the second, third, or
fourth class are added to the list of local government entities allowed to pay certain claims using
electronic funds transfers. To be eligible, local governments must enact specified policy controls
governing the initiation, authorization, and documentation of electronic funds transfers.
Claims Declaration – The requirement to obtain a specific form of written claim declaration was also
repealed based on the understanding that by making the claim, the party making the claim is declaring
that the claim is just and correct and has not been paid previously.
-22-
City E-mail Address Required to Receive State Aid – Effective for state aids payable in 2018 and
thereafter, cities will be required to register an official e-mail address with the Commissioner of the state
Department of Revenue in order to receive state aid payments.
Workforce Housing Tax Increment Financing – The omnibus tax bill created a new authorized use of
tax increment financing (TIF), for workforce housing in cities located outside of the statutorily defined
metropolitan area that meet certain criteria.
Tax Increment Financing Interfund Loans – Interfund loan provisions for TIF were amended to make
it easier for cities and development authorities to make and document interfund loans. Loans may now be
made or documented up to 60 days after the actual transfer or expenditure occurs. Interfund loan
resolutions may now be passed prior to the final approval of the related TIF plan. Loan terms may be
amended after the loan has been made if the TIF district has not been decertified.
Public Debt – The Legislature passed several amendments to statutes governing public debt that took
effect on July 1, 2017, including:
• Allowing both home rule charter and statutory cities to issue 20-year capital notes for projects
to eliminate R-22 Freon-based refrigerant;
• Increasing the maximum dollar limit on Housing and Redevelopment Authority general
obligation bond issues from $3 million to $5 million; and
• Modifying the requirements for street reconstruction bonds to be approved by a two -thirds
majority of the governing body rather than requiring unanimous approval.
Local Housing Trust Funds – The omnibus jobs and economic growth appropriations bill established
authority for cities to create a local housing trust fund by ordinance, or to participate in a joint powers
agreement to establish a regional housing trust fund. The funds, which may be financed from sources such
as local government appropriations or housing and redevelopment authority levies, may be used for grants
or loans for development, rehabilitation, financing of housing to match federal or state or private funds for
housing, down payment assistance, rental assistance, or homebuyer counseling.
Long-Term Equity Investment Authority – Effective July 1, 2017, cities with a population of more
than 100,000 or those that had their most recently issued general obligation bonds rated in the highest
category, are authorized to invest in an expanded list of authorized investments that includes certain
equity-based investments. The amount invested in equity-based investments cannot exceed 15 percent of
the sum of a city’s assigned cash, cash equivalents, deposits, and investments. Before investing in the
expanded list of authorized investments, the governing body of the municipality must adopt a resolution
acknowledging the risks assumed.
Border-to-Border Broadband Grants – The Legislature appropriated $20 million in fiscal 2018 for the
Border-to-Border Broadband Grant Program. The grants, available through the Office of Broadband
Development in the Department of Employment and Economic Development, provide funding to help
communities meet state goals for the development of state-wide, high-speed broadband access, focusing
on areas currently considered to be underserved or with a high concentration of low-income households.
Elections – An omnibus elections law was passed making several modifications to election
administration, including: requiring special elections conducted by local governments be held on one of
five uniform election dates, clarifying the timeline for municipalities to change from odd to even -year
election cycles or vise-versa, allowing municipalities to canvass the results of a primary election on the
second or third day after the primary, and appropriating $7 million for grants to replace aging election
equipment or purchase electronic poll books.
-23-
Workers’ Compensation and PERA Retirement Benefits – A statutory change was adopted based on
the results of recent court rulings that Public Employees Retirement Association (PERA) retirement
benefits should not be offset against workers’ compensation permanent total disability benefits. Under the
new law, claimants would receive all past and future permanent and total disability benefits without a
PERA retirement offset.
Notice of Proposed Ordinances – A new statute was created requiring cities to provide a 10-day notice
prior to a scheduled final vote on most new proposed ordinances or amendments to ordinances, and
specifying the various acceptable means of providing the required notification.
State Building Code Applicability – Construction, additions, and alterations to places of public
accommodation; defined as publicly or privately-owned facilities designed for occupancy by 200 or more
people as a sports or entertainment arena, stadium, theater, community or convention hall, special event
center, indoor amusement facility or water park, or indoor swimming pool; must comply with the state
building code.
Sunday Liquor Sales – Minnesota Statutes were amended to allow for the sale of intoxicating liquor on
Sundays between the hours of 11:00 a.m. and 6:00 p.m. by off-sale licensees, effective July 1, 2017.
REAL ID Act – Minnesota Statutes were amended to make the state compliant with federal REAL ID
Act requirements, which will change identity verification and security related to state-issued identification
cards and driver’s licenses.
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-24-
ACCOUNTING AND AUDITING UPDATES
GASB STATEMENT NO. 75, ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT
BENEFITS OTHER THAN PENSIONS
GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than
Pensions, establishes new accounting and financial reporting requirements for governments whose
employees are provided with other post-employment benefits (OPEB), as well as for certain nonemployer
governments that have a legal obligation to provide financial support for OPEB provided to the
employees of other entities. This statement replaces the requirements of GASB Statement Nos. 45 and 57.
This statement establishes standards for recognizing and measuring liabilities, deferred outflows of
resources, deferred inflows of resources, and expense/expenditures. Similar to changes implemented for
pensions, this statement requires the liability of employer and nonemployer contributing entities to
employees for defined benefit OPEB (net OPEB liability) to be measured as the portion of th e present
value of projected benefit payments to be provided to current active and inactive employees that is
attributed to those employees’ past periods of service (total OPEB liability), less the amount of the OPEB
plan’s fiduciary net position. Note disclosure and RSI requirements about defined benefit OPEB also are
addressed.
The requirements for this statement are effective for fiscal years beginning after June 15, 2017. Earlier
application is encouraged.
GASB STATEMENT NO. 83, CERTAIN ASSET RETIREMENT OBLIGATIONS
This statement addresses accounting and financial reporting for certain asset retirement obligations
(ARO), which are legally enforceable liabilities associated with the retirement of a tangible capital asset.
This statement establishes criteria for determining the timing and pattern of recognition of a liability and a
corresponding deferred outflow of resources for ARO. A government that has legal obligations to perform
future asset retirement activities related to its tangible capital assets should recognize a liability when it is
both incurred and reasonably estimable. The measurement of an ARO is required to be based on the best
estimate of the current value of outlays expected to be incurred, and a deferred outflow of resources
associated with an ARO is required to be measured at the amount of the corresponding liability upon
initial measurement.
This statement requires the current value of a government’s AROs to be adjusted for the effects of general
inflation or deflation at least annually, and a government to evaluate all relevant factors at least annually
to determine whether the effects of one or more of the factors are expected to significantly change the
estimated asset retirement outlays. A government should remeasure an ARO only when the result of the
evaluation indicates there is a significant change in the estimated outlays. Deferred outflows of resources
should be reduced and recognized as outflows of resources in a systematic and rational manner over the
estimated useful life of the tangible capital asset.
If a government owns a minority interest in a jointly owned tangible asset where a nongovernmental
entity is the majority owner or has operational responsibility for the jointly owned asset, the government’s
minority share of an ARO should be reported using the measurement produced by the nongovernmental
majority owner or the nongovernmental minority owner that has operational responsibility, without
adjustment to conform to the liability measurement and recognition requirements of this statement.
-25-
The statement also requires disclosures of any funding or financial assurance requirements a government
has related to the performance of asset retirement activities, along with any assets restricted for the
payment of the government’s AROs. This statement also requires disclosure of information about the
nature of a government’s AROs, the methods and assumptions used for the estimates of the liabilities, and
the estimated remaining useful life of the associated tangible capital assets. If an ARO (or portions
thereof) has been incurred by a government but is not yet recognized because it is not reasonably
estimable, the government is required to disclose that fact and the reasons therefor. This statement
requires similar disclosures for a government’s minority shares of AROs.
The requirements of this statement are effective for reporting periods beginning after June 15, 2018.
Earlier application is encouraged.
GASB STATEMENT NO. 84, FIDUCIARY ACTIVITIES
This statement establishes criteria for identifying fiduciary activities of all state and local governments.
The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary
activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included
to identify fiduciary component units and post-employment benefit arrangements that are fiduciary
activities.
An activity meeting the criteria should be reported in a fiduciary fund in the basic financial statements,
which should present a statement of fiduciary net position and a statement of changes in fiduciary net
position. This statement describes four fiduciary funds that should be reported, if applicable: (1) pension
(and other employee benefit) trust funds, (2) investment trust funds, (3) private -purpose trust funds, and
(4) custodial funds. Custodial funds generally should report fiduciary activities that are not held in a trust
or equivalent arrangement that meets specific criteria.
A fiduciary component unit, when reported in the fiduciary fund financial statements of a primary
government, should combine its information with its component units that are fiduciary component units
and aggregate that combined information with the primary government’s fiduciary funds.
This statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when an
event has occurred that compels the government to disburse fiduciary resources, defined as when a
demand for the resources has been made or when no further action, approval, or condition is required to
be taken or met by the beneficiary to release the assets.
The requirements of this statement are effective for reporting periods beginning after December 15, 2018.
Earlier application is encouraged.
GASB STATEMENT NO. 85, OMNIBUS 2017
The objective of this statement is to address issues that have been identified during implementation and
application of certain GASB statements. The statement addresses a variety of t opics, including issues
related to blending component units, goodwill, fair value measurement and application, and
post-employment benefits (pensions and OPEB). The statement is meant to enhance consistency in the
application of recent accounting and financial reporting standards. The requirements of this statement are
effective for reporting periods beginning after June 15, 2017.
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GASB STATEMENT NO. 86, CERTAIN DEBT EXTINGUISHMENT ISSUES
Current GASB guidance requires that debt be considered defeased in substance when the debtor
irrevocably places cash or other monetary assets acquired with refunding debt proceeds in a trust to be
used solely for satisfying scheduled payments of both principal and interest of the defeased debt. This
new standard establishes essentially the same requirements for when a government places cash and other
monetary assets acquired with only existing resources in an irrevocable trust to extinguish the debt.
The primary objective of this statement is to improve consistency in accounting and financial reporting
for in-substance defeasance of debt by providing guidance for transactions in which cash and other
monetary assets acquired with only existing resources—resources other than the proceeds of refunding
debt—are placed in an irrevocable trust for the sole purpose of extinguishing debt. This statement also
improves accounting and financial reporting for prepaid insurance on debt that is extinguished and notes
to financial statements for debt that is defeased in substance. The requirements of this statement are
effective for reporting periods beginning after June 15, 2017.
GASB STATEMENT NO. 87, LEASES
A lease is a contract that transfers control of the right to use another entity’s nonfinancial asset as
specified in the contract for a period of time in an exchange or exchange -like transaction. Examples of
nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this
definition should be accounted for under the leases guidance, unless specifically excluded in this
statement.
Governments enter into leases for many types of assets. Under the previous guidance, leases were
classified as either capital or operating depending on whether the lease met any of four tests. In many
cases, the previous guidance resulted in reporting lease transactions differently than similar nonlease
financing transactions.
The goal of this statement is to better meet the information needs of users by improving accounting and
financial reporting for leases by governments. It establishes a single model for lease accounting based on
the principle that leases are financings of the right to use an underlying asset. This statement increases the
usefulness of financial statements by requiring recognition of certain lease assets and liabilities for leases
that previously were classified as operating leases and recognized as inflows of resources or outflows of
resources based on the payment provisions of the contract.
Under this statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease
asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby
enhancing the relevance and consistency of information about governments’ leasing activities.
To reduce the cost of implementation, this statement includes an exception for short -term leases, defined
as a lease that, at the commencement of the lease term, has a maximum possible term under the lease
contract of 12 months (or less), including any options to extend, regardless of their probability of being
exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or
inflows of resources, respectively, based on the payment provisions of the lease contract. The
requirements of this statement are effective for reporting periods beginning after December 15, 2019.
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