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2008 Monticello Auditor's Management Letter�S'ralPp'!'ASgl�y�r 1 Rt � f� Management Report for City of Monticello, Minnesota December 31, 2008 ' To the City Council City of Monticello, Minnesota We have prepared this management report in conjunction with our audit of the City of Monticello, Minnesota's (the City) financial statements for the year ending December 31, 2008. The purpose of this report is to communicate information relevant to city finances in Minnesota and to provide comments resulting from our audit process. We have organized this report into the following sections: • Audit Summary • Funding Cities in Minnesota • Governmental Funds Overview • Financial Trends and Analysis • Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. This report is intended solely for the information and use of management, those charged with governance of the City, and those who have responsibility for oversight of the financial reporting process. 1 INSERT DATE 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. UNDERSTANDING THE AUDITOR'S RESPONSIBILITY Our responsibility, as stated in our engagement letter and as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute assurance about whether the financial statements are free of material misstatement and are fairly presented in accordance with accounting principles generally accepted in the United States of America. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope previously discussed and coordinated with the City in order to obtain sufficient audit evidence and complete an effective audit. AUDIT OPINION AND FINDINGS • We have issued an unqualified opinion on the City's financial statements. We reported four findings related to the City's internal controls over financial reporting. These include findings on the following: o Recorded audit adjusting journal entries o Recorded prior period adjustments o Inadequate documentation of the components of internal controls o Deficiencies in the entity -level internal controls over information technology We reported two findings related to the City's compliance with Minnesota laws and regulations. These findings include the following: o Contract language for the payment of subcontractors o Lack of a budget for capital improvements and lack of a parks and open space comprehensive plan 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. The City implemented Governmental Accounting Standards Board (GASB) Statement No. 45, "Accounting and Financial Reporting by Employers for Post -Employment Benefits Other Than Pensions," during the year ended December 31, 2008. This statement provides new guidance on accounting and financial reporting for "other post -employment benefits" (OPEB) accounted for in the financial statements of plan sponsors or employers. We noted no transactions entered into by the City during the year for which there is a lack of authoritative ' guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. -1- AUDIT ADJUSTMENTS 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. Professional standards define an audit adjustment as a proposed correction of the financial statements ' that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future financial statements to be materially misstated). We recognize that for management purposes, the City maintains its accounting records primarily using the cash basis during the year. We did propose certain entries while assisting your finance staff in the closing of the year-end accounting records. These types of adjustments are not considered "misstatements" for purposes of this communication. 1 During our audit we made two audit adjustments that had a material impact on the financial statements. These audit adjustments were reviewed and approved by management and incorporated into the annual financial report of the City. ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS The City uses estimates of useful lives for the depreciation of capital assets. Management expects any differences between estimates and actual amounts of these estimates to be insignificant. We reviewed and tested management's procedures and underlying supporting documentation in the area discussed above. We concluded that the accounting estimates and management judgments appeared to consider all significant factors and resulted in appropriate accounting recognition. The most sensitive estimates affecting the financial statements were as follows: • Depreciation — Management's estimates of depreciation expense are based on the estimated useful lives of the assets. • 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. • Land Held for Resale — Management's estimates of this asset are based on net realizable value (lower of cost or estimated sales price). • Compensated Absences — Management's estimate is based on current rates of pay and sick leave balances. Management expects any differences between estimates and actual amounts of these estimates to be insignificant. We reviewed and tested management's procedures and underlying supporting documentation in the area discussed above. We concluded that the accounting estimates and management judgments appeared to consider all significant factors and resulted in appropriate accounting recognition. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. -2- DISAGREEMENTS WITH MANAGEMENT For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated INSERT DATE. 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 MATTERS 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. -3- FUNDING CITIES IN MINNESOTA LEGISLATION The following is a brief summary of recent legislative activity affecting the finances of Minnesota cities: 1 Levy Limitations — The 2008 Legislature passed a law that will limit general operating property tax levy increases for Minnesota cities with populations over 2,500 to 3.9 percent annually for the next three years. Local Government Aid (LGA) and Market Value Homestead Credit (MVHC) — Due to the state's economic condition, Minnesota cities received "unallotment" notices reducing the payment of these state aids for the second half of 2008. It is expected that these payments to cities may again be reduced for the 2009 fiscal year. FEDERAL RECOVERY ACT The American Recovery and Reinvestment Act of 2009 is expected to provide approximately $300 billion ' in federal funds to state and local governments, and to institutions of higher education. These funds are intended to supplement existing federal programs, create new programs, or provide more broad fiscal relief. Many cities are hoping to receive some of these temporary funds for programs and projects. The American Recovery and Reinvestment Act of 2009 mandates that there be an unprecedented amount of oversight and transparency around the spending of these funds, including specific audit and internal control requirements. The additional internal control requirements include the need for controls over the acceptance of recovery funds, appropriate controls over the segregation of these funds from other sources of revenue, compliance with the additional laws and regulations specific to each grant award, and additional financial reporting requirements back to the appropriate federal agency. ' These additional controls also include considerations into whether control procedures are in place over the federal grant expenditures to prevent unallowable expenditures, consideration into whether additional controls and systems will be needed to ensure funds are able to be separately tracked and identified, and consideration into if controls are sufficient for any funds that are passed along to subrecipients. PROPERTY TAXES Our management reports have tracked the evolution of property tax reform in Minnesota, and explained its impact on cities and their property owners. Now, with very little change in property tax formulas, attention is turning toward our current real estate and housing environment, mortgage foreclosures, and the world economy. Property values within Minnesota cities experienced average increases of 11.0 percent for taxes payable in 2007 and 7.0 percent for those payable in 2008, reflecting the slowdown in growth in market values. In comparison, the City's market value increased by 16.8 percent in 2007 and 7.2 percent in 2008. It is important to remember that the 2008 market value is based on estimated values as of January 1, 2007, and the housing market is still experiencing difficult times. K,I The following graph shows the City's changes in taxable market value over the past six years: $1,400,000,000 $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000,000 Market Value 2003 2004 2005 2006 2007 2008 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 has a different calculation and uses different rates. The graphs show that tax capacities have not increased at the same rate as market values, primarily due to property tax reform occurring over this period of time. The following graph shows the City's change in tax capacities over the past six years: $18,000,000 $15,000,000 $12,000,000 $9,000,000 $6,000,000 $3,000,000 Tax Capacity 2003 2004 2005 2006 2007 2008 Us Although it is impossible to consider every aspect and variable of local government spending, average tax rates are often used as a benchmark. Rates expressed as a percentage of net tax capacity The City's portion as well as the total average tax rate for Monticello residents was well above the state-wide and metro area averages the last two years. -6- All Cities Seven -County State -Wide Metro Area City of Monticello 2007 2008 2007 2008 2007 2008 Average tax rate City 36.1 36.3 33.4 33.6 42.5 46.9 County 38.5 38.0 35.2 34.9 30.7 31.7 School 22.2 21.1 22.7 21.3 23.2 25.3 Special taxing 5.5 5.6 6.8 7.0 3.0 2.5 Total 102.3 101.0 98.1 96.8 99.4 106.4 The City's portion as well as the total average tax rate for Monticello residents was well above the state-wide and metro area averages the last two years. -6- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City's governmental funds. Governmental funds include the General Fund, special revenue funds, debt service funds, and capital projects funds. We have also included the most recent comparative state-wide averages available from the State Auditor. The reader needs to consider the effect of inflation and other known changes or differences when comparing this data. Also, certain data on these tables may be classified differently than how they appear on the City's financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management's Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. VW GOVERNMENTAL FUNDS REVENUE The amounts received from the typical major sources of revenue will naturally vary between cities based on their particular situation. This would include the City's stage of development; location, size, and density of its population; property values; services it provides; and other attributes. The following table presents the City's revenue per capita of its governmental funds for the past three years, together with state-wide averages: Governmental Funds Revenue per Capita With State -Wide Averages by Population Class The City has generated more property tax revenue for its governmental funds revenue compared to the average Minnesota city. The City continues to generate more tax increment revenue per capita than average, as it has made use of this tool to finance commercial development. The City generates more special assessment revenue (typically used for new development) as the City continues to be in a growth phase. The City's per capita governmental funds revenue for 2008 was $1,458, a decline of about 8.6 percent from the prior year. The largest decline was in intergovernmental revenues related to the City receiving less state aid for capital projects and street projects in 2008. The City also received less intergovernmental revenue related to cuts in state aid to cities during the unallotment process at the state level to balance the state-wide budget. Charges for services experienced declines in 2008 as engineering, planning, sanitary sewer, water, and storm water fees declined due to less development activity in the City during 2008. Other revenue above also decreased in 2008 as interest earnings in 2008 declined $63 per resident as interest rates declined significantly. -7- State -Wide City of Monticello Year December 31, 2007 2006 2007 2008 Population 2,500-10,000 10,000-20,000 20,000-100,000 11,136 11,253 11,253 Property taxes $ 333 $ 332 $ 353 $ 580 $ 550 $ 643 Tax increments 46 52 56 71 73 104 Franchise fees and other taxes 22 32 35 — 13 — Special assessments 89 54 73 180 277 228 Licenses and permits 33 28 37 68 56 82 Intergovernmental revenues 273 267 169 84 157 49 Charges for services 106 88 82 251 257 204 Other 126 108 113 598 213 148 Total revenue $ 1,028 $ 961 $ 918 $ 1,832 _L1,596 $ 1,458 The City has generated more property tax revenue for its governmental funds revenue compared to the average Minnesota city. The City continues to generate more tax increment revenue per capita than average, as it has made use of this tool to finance commercial development. The City generates more special assessment revenue (typically used for new development) as the City continues to be in a growth phase. The City's per capita governmental funds revenue for 2008 was $1,458, a decline of about 8.6 percent from the prior year. The largest decline was in intergovernmental revenues related to the City receiving less state aid for capital projects and street projects in 2008. The City also received less intergovernmental revenue related to cuts in state aid to cities during the unallotment process at the state level to balance the state-wide budget. Charges for services experienced declines in 2008 as engineering, planning, sanitary sewer, water, and storm water fees declined due to less development activity in the City during 2008. Other revenue above also decreased in 2008 as interest earnings in 2008 declined $63 per resident as interest rates declined significantly. -7- IGOVERNMENTAL FUNDS EXPENDITURES Similar to our discussion of revenues, 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 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 Population Current General government Public safety Street maintenance and lighting Recreation All other Capital outlay and construction Debt service Principal Interest and fiscal Governmental Funds Expenditures per Capita With State -Wide Averages by Population Class $ 587 $ 616 $ 579 $ 1,159 $ 795 $ 795 $ 481 $ 341 $ 328 $ 1,174 $ 571 $ 313 $ 161 $ 133 $ 100 $ 306 $ 301 $ 448 71 47 39 213 201 195 $ 232 $ 180 $ 139 $ 519 $ 502 $ 643 The City's governmental funds current per capita expenditures are higher than state-wide averages for cities in the same population class. The City's current operating costs are higher than average in most categories other than public safety costs. The City's per capita expenditures for capital are higher than state-wide averages, but will vary on a yearly basis depending on current, ongoing capital projects. Debt service costs are significantly higher than other cities state-wide. State -Wide City of Monticello December 31, 2007 2006 2007 2008 2,500-10,000 10,000-20,000 20,000-100,000 11,136 11,253 11,253 $ 122 $ 106 $ 83 $ 157 $ 169 $ 140 208 224 223 248 142 154 110 105 94 323 173 212 62 83 82 204 197 197 85 98 97 227 114 92 $ 587 $ 616 $ 579 $ 1,159 $ 795 $ 795 $ 481 $ 341 $ 328 $ 1,174 $ 571 $ 313 $ 161 $ 133 $ 100 $ 306 $ 301 $ 448 71 47 39 213 201 195 $ 232 $ 180 $ 139 $ 519 $ 502 $ 643 The City's governmental funds current per capita expenditures are higher than state-wide averages for cities in the same population class. The City's current operating costs are higher than average in most categories other than public safety costs. The City's per capita expenditures for capital are higher than state-wide averages, but will vary on a yearly basis depending on current, ongoing capital projects. Debt service costs are significantly higher than other cities state-wide. FINANCIAL TRENDS AND ANALYSIS 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 operations, 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 six years. We have also included an expenditure line to reflect the change in the size of the General Fund operation over the same period. $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 General Fund Financial Position Year Ended December 31, 2003 2004 2005 2006 2007 2008 � Fund Balance O Cash Balance Expenditures The City's General Fund cash and investments balance at December 31, 2008 was $7,872,522, which increased about $775,000 from 2007. Total fund balance at December 31, 2008 was $6,178,552, up $617,065 from the prior year. Of this total fund balance, $4,892,113 was reserved or designated and $1,286,439 was undesignated. This fund balance level represents approximately 91 percent of the City's annual General Fund expenditures, based on 2008 expenditure levels. Over the last few years, the City has generally been able to maintain or increase cash and fund balance levels. This is an important factor because a government, like any organization, requires a certain amount of equity to operate. Generally, the amount of equity required typically increases as the size of the operation increases. A healthy fund balance is important because a government, like any organization, requires a certain amount of equity to operate. The amount of required equity increases as the size of the operation increases. Increase in the size of the operation is natural, caused by things such as inflation, population growth, desired increases in services, and—something which has impacted cities significantly in recent years—mandated increases in services and administrative requirements. 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 can be a factor in determining the City's bond rating and resulting interest costs. -9- The following graph reflects the City's General Fund reliance on its revenue sources for 2008: General Fund Revenue Property Taxes Licenses/Permits Intergovernmental Charges for Services Other ,�( OHO QUO �& �& �& OHO OQO chap, �O�p, hip, Opp, ��p, ODp, hOp, ���p, o�p, hip, Opp, O Actual ■ Budget Total General Fund revenues for 2008 were $7,585,646, which was $149,885 (2 percent) over the final budget. Property taxes were less than budget by $283,387, mostly due to the second half of the MVHC not being received in 2008. License and permit revenues were over budget by $325,244 mostly related to storm damaged homes needing repairs and replacement permits. Charges for services were under budget by about $148,000, mostly due to engineering fees being about $82,500 under budget related to less projects taking place that required engineering services. The following graph presents the City's General Fund revenue sources for the last six years. The graph reflects the City's increasing reliance on taxes and user fees to finance its General Fund operations. $6,000,000 $5,500,000 $5,000,000 $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 General Fund Revenue by Source Year Ended December 31, 2003 2004 2005 2006 2007 2008 ■ Taxes ■ Intergovernmental O Other Overall, General Fund revenues increased $112,488 (1.5 percent) from the previous year. Property taxes was the largest increase totaling about $1,000,000 in calendar 2008. This increase is offset by a decline in charges for services totaling about $885,000. This decline was mainly in engineering fees of about $425,000 as discussed. This decline was also due to the City moving deputy registrar fees totaling about $270,000 to a separate special revenue fund in 2008. -10- The following illustrations provide you with the components of the City's General Fund spending for 2008 and for the past six years: General Fund Expenditures General Government Public Safety Public Works Culture and Recreation Other � 00o O0o 000 000 000 000 000 000 000 000 000 X00 $.(^00 X00 `��00 000 ,�00 X00 X00 X00 000 X00 SIV Sill O Actual ■ Budget Total General Fund expenditures for 2008 were $6,806,940, which was $614,969 (8.3 percent) under the final budget. The largest variances were related to budgets for capital outlay in many of the city departments that were not spent in calendar 2008. The cumulative total of these under budgeted amounts total about $585,000. Bigger differences occurred in public safety where the budget included about $160,000 for some of the cost of a new fire truck which is expected to be purchased in fiscal 2009. The public works department budget included about $305,000 of unspent capital expenditures mainly for vehicles. $2,400,000 $2,200,000 $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 General Fund Expenditures by Function Year Ended December 31, 2003 2004 2005 2006 2007 2008 ■ General Governmental 0 Public Safety ■ Public Works ■ Culture and Recreation ■ Other Overall, General Fund expenditures decreased $464,227 (6.4 percent) from the prior year. General government expenditures decreased about $325,000 which was mainly related to the move of the deputy registrar expenditures totaling around $180,000 being moved to a special revenue fund in fiscal 2008. Also, data processing costs decreased about $97,000 related to the startup costs of the fiber optics project reported in fiscal 2007. Public works department costs declined about $250,000 in 2008 as capital outlay programs decreased by almost $480,000 in fiscal 2008. -11- ENTERPRISE FUNDS The enterprise funds comprise a considerable portion of the City's activities. The following information provides trend information on the activities of these funds. Water Enterprise Fund At December 31, 2008, the Water Enterprise Fund had a cash balance of $2,123,494 and net assets of $12,423,941. Net assets consisted of $10,068,530 in amounts invested in capital assets and $2,355,411 in unrestricted net assets. $1,100,000 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Water Enterprise Fund Year Ended December 31, 2003 2004 2005 2006 2007 2008 O Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation Water Enterprise Fund operating revenues for 2008 were $992,430, which were $90,525 higher than the previous year. Most of this increase was related to an increase in the water rates. As shown in the above graph, operating income before depreciation has been steadily increasing over the past several years. It is important that this fund continue to have positive operating results so as not to place additional burden on other city funds. It is also important that the City continue to monitor water rates so that they are designed to also provide for future repairs and replacement of the infrastructure assets. -12- Sewer Enterprise Fund At December 31, 2008, the Sewer Enterprise Fund had a cash balance of $1,871,893 and net asset balance of $21,012,244. Net assets consisted of $18,944,284 invested in capital assets and $2,067,960 of unrestricted net assets. $2,200,000 $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $(200,000) Sewer Enterprise Fund Year Ended December 31, 2003 2004 2005 2006 2007 2008 O Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation Sewer Enterprise Fund operating revenues for 2008 were $1,338,199, which is $112,719 more than the previous year. Most of this increase relates to an increase in sewer rates. Operating income before depreciation was $280,175 in 2008. It is important that this fund have positive operating results so as not to place an additional burden on other city funds. It is also important that the City continue to monitor sewer rates so they are designed to also provide for future repairs and replacement of the infrastructure assets. -13- LIQUOR FUND The following graph presents six years of operating results for the Liquor Fund: $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 Liquor Fund Year Ended December 31, 2003 2004 2005 2006 2007 2008 D Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Fund ended 2008 with net assets of $2,830,572, an increase of $365,614 from the prior year. Of the net asset balance, $476,372 represents the investment in liquor capital assets, leaving $2,354,200 of unrestricted net assets. Liquor sales for 2008 were $4,085,682, an increase of $316,605 (8.4 percent) from last year. Sales have steadily increased over the last several years, increasing by about 21 percent since 2003. The Liquor Fund generated a gross profit of $1,059,479 in 2008 or about 26 percent of gross sales. The Liquor Fund gross profit margin has been similar for the last several years, ranging from 25.5 percent to 26.6 percent between 2003 and 2008. Operating expenses for 2008 were $620,743, a decrease of $24,114 or 3.7 percent lower than last year. -14- GOVERNMENT -WIDE FINANCIAL STATEMENTS The City's financial statements include fund -based information that focuses on budgetary compliance, and the sufficiency of the City's current assets to finance its current liabilities. The GASB Statement No. 34 reporting model also requires the inclusion of two government -wide financial statements designed to present a clear picture of the City as a single, unified entity. These government -wide statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. ■ Statement of Net Assets ' The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable ' form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Assets divides the net assets into three components: net assets invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. ' The following table presents the City's net assets as of December 31, 2008 for governmental activities and business -type activities: The City's total net assets at December 31, 2008 were $5,079,040 higher than at the beginning of the year. A large portion of this increase was due to a prior period adjustment to capital assets and land held for resale totaling $4,637,388 to properly account for capital assets and land held for resale activity of the past several years. The City did have a significant decline in net assets within its business -type activities related to the deficit in the financial operation of the fiber optics project totaling about $1,150,000 in fiscal 2008. -15- Governmental Business -Type Activities Activities Total Net assets Current and other assets $ 55,438,385 $ 31,598,427 $ 87,036,812 Net book value of capital assets 74,668,977 32,897,745 107,566,722 Current liabilities (4,576,409) (1,166,698) (5,743,107) Long-term liabilities (47,426,533) (27,404,404) (74,830,937) Total net assets $ 78,104,420 $ 35,925,070 $ 114,029,490 Net assets Invested in capital assets, net of related debt $ 27,584,763 $ 31,375,890 $ 58,960,653 Restricted 22,074,427 19,350 22,093,777 Unrestricted 28,445,230 4,529,830 32,975,060 Total net assets $ 78,104,420 $ 35,925,070 $ 114,029,490 The City's total net assets at December 31, 2008 were $5,079,040 higher than at the beginning of the year. A large portion of this increase was due to a prior period adjustment to capital assets and land held for resale totaling $4,637,388 to properly account for capital assets and land held for resale activity of the past several years. The City did have a significant decline in net assets within its business -type activities related to the deficit in the financial operation of the fiber optics project totaling about $1,150,000 in fiscal 2008. -15- ' ACCOUNTING AND AUDITING UPDATES ' GASB STATEMENT N0.45 - ACCOUNTING AND FINANCIAL REPORTING BY EMPLOYERS FOR POST -EMPLOYMENT BENEFITS OTHER THAN PENSIONS This statement provides new guidance on accounting and reporting for post -employment benefits other than pensions by employers when the plan is not accounted for in their financial statements. OPEB refer to non -pension benefits provided after the termination of employment. One example of this type of benefit is healthcare premiums paid by employers on behalf of former employees. Governmental entities have traditionally accounted for OPEB on a pay-as-you-go basis, with only a few governments ' funding these benefits in advance of payment. The guidance in this statement rests on the assumption that OPEB liabilities should be accrued as they are earned by employees providing service to the entity. Under GASB Statement No. 45, governments offering OPEB will recognize the cost of these benefits using a three-step approach. The government will be required to project future benefits, discount those benefits to their present value, then use an acceptable actuarial method to allocate costs to individual accounting periods. Once calculated, the difference between the present value of OPEB benefits earned by employees as the result of past service and resources set aside to pay those benefits will be considered the "unfunded actuarial liability for OPEB." Every employer will be allowed to start fresh at the time of transition to the new standard. There will be no requirement for an employer to recognize an accounting liability for underfunding prior to the implementation of the new standard. Instead, the unfunded actuarial accrued ' liability for OPEB at transition would be amortized over 30 years. As long as an employer funds the full amount of the actuarially determined annual required contribution (ARC) for these benefits each year, no asset or liability will be reported on the Statement of Net Assets. However, an employer will need to ' report a "net pension obligation" on its Statement of Net Assets as an asset or liability if it contributes more or less, respectively, than the ARC each year. Nothing in the statement is intended to alter the normal application of modified accrual accounting in the governmental funds of the entity. Thus, in governmental funds, OPEB expenditures normally would be recognized when the benefits are due and payable rather than when benefits are earned. The guidance will require that actuarial valuations for OPEB occur at least every two years for plans with 200 or more members, and every 3 years for plans with fewer than 200 members. A sole employer plan with fewer than 100 plan members has the option to apply a simplified alternative measurement method rather than obtain actuarial valuations. The statement will become effective in three phases based on the same criteria as those defined for the ' implementation of GASB Statement No. 34. GASB Statement No. 45 will be phased in for cities over a three-year period, which started with category one cities in the fiscal year ending December 31, 2007. GASB STATEMENT N0.47 - ACCOUNTING FOR TERMINATION BENEFITS GASB Statement No. 47 provides accounting and reporting guidance for state and local governments that offer benefits such as early retirement incentives or severance to employees that are involuntarily terminated. The statement requires that similar forms of termination benefits be accounted for in the same manner and is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements. GASB Statement No. 47 is effective for financial statements for periods beginning after June 15, 2005, or may be implemented simultaneously with GASB Statement No. 45, depending on your circumstances. -16- GASB STATEMENT No. 50 — PENSION DISCLOSURES — AN AMENDMENT OF GASB STATEMENT ' Nos. 25 AND 27 This statement expands the disclosure requirements for pension plans, similar to those requirements in GASB Statement Nos. 43 and 45. This will require additional discussion on funding status, use of assumptions, and the determination of contribution rates. This statement is effective for cities for the year ended December 31, 2008. GASB STATEMENT No. 51— ACCOUNTING AND FINANCIAL REPORTING FOR INTANGIBLE ASSETS Governments possess many different types of assets that may be considered intangible assets, including ' easements, water rights, timber rights, patents, trademarks, and computer software. This statement requires that all intangible assets not specifically excluded by its scope provisions be classified as capital assets. The requirements in this statement improve financial reporting by reducing inconsistencies that ' have developed in accounting and financial reporting for intangible assets. These inconsistencies will be reduced through the clarification that intangible assets subject to the provisions of this statement should be classified as capital assets, and through the establishment of new authoritative guidance that addresses issues specific to these intangible assets given their nature. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. GASB STATEMENT No. 53 - ACCOUNTING AND FINANCIAL REPORTING FOR DERIVATIVE INSTRUMENTS The guidance in this statement improves financial reporting by requiring governments to measure derivative instruments at fair value in their economic resources measurement focus financial statements. These improvements should allow users of those financial statements to more fully understand a government's resources available to provide services. The disclosures provide a summary of the government's derivative instrument activity and the information necessary to assess the government's objectives for derivative instruments, their significant terms, and the risks associated with the derivative instruments. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2009. GASB STATEMENT No. 54 - FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE DEFINITIONS The objective of this statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The definitions of the general fund, special revenue fund type, capital projects fund type, debt service fund type, and permanent fund type are clarified by the provisions in this statement. The requirements are also intended to enhance the consistency between information reported in the government -wide statements and information in the governmental fund financial statements and avoid confusion about the relationship between reserved fund balance and restricted net assets. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2010. -17-