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2009 Monticello Auditor's Management Letter Management Report for City of Monticello, Minnesota December 31, 2009 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, 2009. 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 those charged with governance of the City, management, and those who have responsibility for oversight of the financial reporting process and is not intended to be, and should not be, used by anyone other than these specified parties. June 10, 2010 -1- 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. 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, 2009. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America, Government Auditing Standards, and the U.S. Office of Management and Budget Circular A-133, 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 to you the following information related to our audit. AUDIT OPINION AND FINDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2009: • We have issued an unqualified opinion on the City’s annual financial statements. • We noted one matter involving the City’s internal control over financial reporting that we consider to be a material weakness. During our audit procedures, we proposed audit adjustments to accounts receivables that were considered material to the financial statements that had not been recorded properly in accordance with accounting principles generally accepted in the United States of America that were not initially identified by the City prior to our audit procedures detecting the misstatements. Auditing standards consider the identification by the auditor of a material misstatement in the financial statements prepared by the City that was not initially identified by the City to be a material weakness in the related internal controls. • The results of our testing disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. • We noted that the Schedule of Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial statements. • The results of our tests indicate that the City has complied, in all material respects, with the requirements applicable to each major federal program. • We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses in our testing of major federal programs. • We reported one finding based on our testing of the City’s compliance with Minnesota laws and regulations. If a city invests in mutual funds, it must invest in shares of an investment company that is rated in one of the two highest rating categories for mutual funds by at least one nationally recognized statistical rating organization. One mutual fund the City invested in during fiscal 2009 did not meet this requirement as the mutual fund was not rated. -2- OTHER RECOMMENDATIONS We offer the following observations and recommendations for the continued improvement of the City’s internal controls over financial reporting: • Bids and Quotes – During our audit, it was noted that the use of the terms “Bid” and “Quote” were used interchangeably by city personnel and the City Council. Minnesota laws and regulations require the testing of bids and quotes on an annual basis. If it is City Council’s intent to receive bids for contracts, even though the amount of the contract falls within the statute for a quote, the bid requirements must be followed. Therefore, during the approval process of quotes and bids, the City Council and city personnel should be clear of their intent. • Information Technology Contingency Planning – Management is responsible for establishing and maintaining effective internal controls, including entity level controls (control environment, risk assessment, information and communication, and monitoring) and for the fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America. Auditing and reporting standards specify that we report deficiencies in the design of the entity-level controls of the City’s internal controls. As part of our audit, we noted the City has designed the general controls over the information technology (IT) system in the City, including having a contingency plan developed for alternative processing in the event of loss or interruption of IT functions. These controls are intended to prevent the possibility of the IT system of the City from not being able to provide complete and accurate information consistent with the financial reporting objectives and current needs of the City. We recommend, however, that the City improve these internal controls over the IT functions of the City by having these contingency plans formally documented and written to be included in the design of the general controls over the IT system in the City. This formal documentation would include distribution of the contingency plan developed for alternative processing in the event of loss or interruption of IT functions to all city employees. 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, 2009, we performed procedures to follow-up on the findings and recommendations that resulted from our prior year audit. The following is a summary of prior year findings and recommendations along with the results of our follow-up procedures: • In the prior year, we reported that a prior audit adjustment was necessary to more accurately reflect the capital assets and land held for resale balances. There were no prior period audit adjustments as a result of this year’s audit. • In the prior year, we noted that the City lacked adequate documentation of the components of internal controls. In correlation with the implementation of the City’s new software system, the finance department has documented many internal control procedures. • In the prior year, we reported deficiencies in the entity-level components of internal controls. We noted that the City had not adequately designed the general controls of the IT system in the City. With the implementation of the City’s new software system, these control deficiencies have been addressed during fiscal 2009. -3- • In the prior year, the City had failed to include contract language for the payment of subcontractors in its contracts. During this year’s audit testing, it was noted that contracts now included the required language. • In the prior year, the City had failed to approve a capital improvement budget and parks and open space plan. During this year’s audit, we reviewed the City Council-approved capital improvement budget which included the City’s parks and open space 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. No new accounting policies were adopted and the application of existing policies was not changed during the year. 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 differ significantly from those expected. The most sensitive estimates affecting the financial statements of the City include the following: • 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 evaluated the key factors and assumptions used by management in the areas discussed above in determining that they are reasonable in relation to the financial statements taken as a whole. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosure affecting the financial statements was: • Net OPEB disclosures DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. -4- 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. During our audit we made one audit adjustments that had a material impact on the financial statements. This audit adjustment was reviewed and approved by management and incorporated into the annual financial report of the City. Also, during the fiscal 2009 audit, we identified known uncorrected financial statement misstatements (passed adjustments). These passed adjustments included approximately $7,080 of interest revenue. DISAGREEMENTS WITH MANAGEMENT For purposes of this report, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated June 10, 2010. 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. -5- FUNDING CITIES IN MINNESOTA LEGISLATION The following is a summary of significant legislative activity passed in calendar 2009 affecting the finances of Minnesota cities: Unallotment – The 2009 legislative session ended without an agreement on how to erase the state budget deficit. The Legislature approved and sent a final package of budget-balancing tax items to the Governor, but the Governor vetoed the bill and balanced the budget on his own using his power of unallotment. The Governor’s unallotment plan included delays in the payment of state revenues to school districts, and a reduction in appropriations to other state programs, including local government aid (LGA) and market value homestead credit (MVHC). The unallotments included $193 million in reductions in calendar 2009 and 2010 to LGA and MVHC to cities, calculated at 3.31 percent and 7.64 percent, respectively, of the total calendar 2009 aggregated levy and LGA of the city. Cuts are first taken from LGA and then from MVHC, as necessary. A city’s total reduction could not exceed $22 and $55 per capita, respectively. Cities with populations below 1,000 and below the state-wide average tax base per capita were exempted from these cuts. In May 2010, the Minnesota Supreme Court ruled on a lawsuit brought by a program that had its funding cut through unallotment. The court ruled that the Governor’s “use of unallotment power to address the unresolved deficit exceeded the authority granted to the executive branch by statute.” While the court ruled only on the cuts to this specific program, the decision called into question all of the Governor’s reductions, which were subsequently revisited during the 2010 legislative session. Levy Limitations – The 2008 Legislature passed a law that limits general operating property tax levy increases for cities with populations over 2,500 to 3.9 percent annually for the next three calendar years. The 2009 legislative session ended with levy limits intact. Levy limits will remain in place for at least the 2010 budget year, with a couple of minor modifications that were contained in laws passed in 2009. For the calendar 2010 tax year, cities will be able to declare “special levies” for the calendar 2008 and 2009 unallotment losses described earlier. The calendar 2010 unallotment losses can be declared for the 2011 tax year. Emergency Certificates of Indebtedness – The law authorizes a city to issue emergency debt certificates if the city’s current year revenues are reasonably expected to be reduced below the amount provided in the city’s budget approved when the property tax levy of the city was certified. This law only allows for the issuance of this debt if the revenues of the city will be insufficient to meet the expenses incurred or to be incurred during the current fiscal year. For example, emergency debt certificates could be issued as a result of mid-year reductions in state aid payments for LGA or MVHC, or when a city is experiencing a high level of property tax delinquencies. This law also requires the city to levy property taxes for the payment of principal and interest on the certificates issued. 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. -6- 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 Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. In recent years this dependence has been heightened as revenue from state aids and fees related to new development have dwindled due to the struggling economy. This has placed added pressure on local taxpayers already beset by higher unemployment, lower property values, and tighter credit markets. As a result, municipalities in general are experiencing increases in tax delinquencies, abatements, and foreclosures. This instability has led to significant fiscal challenges for many local governments, and increased the investing public’s concerns about the security of the municipal debt market. Property values within Minnesota cities experienced average increases of 7.0 percent for taxes payable in 2008 and 1.5 percent for those payable in 2009, reflecting the slowdown in growth in market values. It is important to remember that the 2009 market value is based on estimated values as of January 1, 2008, and the housing market is still experiencing difficult times. In comparison, the City’s market value increased by 3.1 percent in 2008 and declined 2.9 percent in 2009. The following graph shows the City’s changes in taxable market value over the past seven years: $– $200,000,000 $400,000,000 $600,000,000 $800,000,000 $1,000,000,000 $1,200,000,000 $1,400,000,000 2003200420052006200720082009 Taxable Market Value 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 a city’s tax base that is in each property classification from year-to-year, as well as legislative changes to tax rates. The City’s tax capacity increased 6.8 percent for 2008 and increased 3.7 percent for 2009. -7- The following graph shows the City’s change in tax capacities over the past seven years: $– $4,000,000 $8,000,000 $12,000,000 $16,000,000 $20,000,000 2003200420052006200720082009 Local Tax Capacity 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 2008200920082009 20082009 Average tax rate City 36.3 36.9 33.6 33.7 46.9 46.2 County 38.0 39.3 34.9 34.7 31.7 32.5 School21.1 22.0 21.3 22.1 25.3 26.1 Special taxing5.6 5.5 7.0 5.9 2.5 2.1 Total101.0 103.796.8 96.4 106.4 106.9 City of MonticelloMetro Area Seven-CountyAll Cities State-Wide The City’s portion as well as the total average tax rate for its residents was well above the state-wide and metro area averages for the last two years. -8- 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 project funds. We have also included the most recent comparative state-wide averages available from the Office of the State Auditor. The reader needs to consider the effect of inflation and other known changes or differences when comparing this data. Also, certain data on these tables may be classified differently than how they appear on the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management’s Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Keep in mind that your city’s per capita revenue and expenditures maybe higher or lower than average due to your city’s level of commercial development and activity for a city in your population class. 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: Year 200720082009 Population2,500–10,000 10,000–20,000 20,000–100,000 11,25311,36611,476 Property taxes355$ 351$ 376$ 550$ 636$ 654$ Tax increments47 56 61 73 103 104 Franchise fees and other taxes22 34 37 13 – 4 Special assessments81 53 61 277 226 215 Licenses and permits27 25 33 56 81 23 Intergovernmental revenues247 242 147 157 48 147 Charges for services82 78 79 257 201 219 Other97 95 89 213 146 105 Total revenue958$ 934$ 883$ 1,596$ 1,441$ 1,471$ December 31, 2008 City of Monticello Governmental Funds Revenue per Capita With State-Wide Averages by Population Class State-Wide 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 2009 was $1,451, an increase of about 0.2 percent from the prior year. Intergovernmental revenue increased by $99 per capita due to the City receiving more state and federal grants, including Utility Value Transition aid, a Federal Emergency Management Agency (FEMA) grant, and a Community Development Block Grant (CDBG). Revenue from licenses and permits and investment income were down $58 and $60 per capita, respectively, due to the changes in the economic conditions and the resulting downturn in the revenue in these areas. -9- GOVERNMENTAL FUNDS EXPENDITURES Similar to our discussion of revenues, the expenditures of governmental funds will vary from state-wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating-type expenditures occurring on an annual basis, and are primarily funded by general sources such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project oriented, which are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Year 200720082009 Population2,500–10,000 10,000–20,000 20,000–100,000 11,25311,36611,476 Current 130$ 115$ 86$ 169$ 139$ 142$ 217 234 237 142 153 239 114 113 88 173 209 181 65 86 86 197 195 205 81 94 100 114 92 121 607$ 642$ 597$ 795$ 788$ 888$ Capital outlay and construction379$ 338$ 327$ 571$ 310$ 170$ Debt service 171$ 135$ 112$ 301$ 443$ 588$ 71 48 41 201 193 157 242$ 183$ 153$ 502$ 636$ 745$ Interest and fiscal General government Public safety Street maintenance and lighting Recreation All other Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Monticello Principal December 31, 2008 State-Wide The City’s governmental funds current per capita expenditures are higher than state-wide averages for cities in the same population class. Current operating costs increased $100 per capita in 2009. Most of this increase relates to public safety expenditures and the other category increasing a total of $86 per capita due to expenditures from the FEMA and CDBG grants the City received in fiscal 2009 as discussed on the previous page. The City’s per capita expenditures for capital are lower 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. Debt service costs were $109 per capita higher in calendar 2009 as the City used current resources available to pay the remaining principal on the 2003A Improvement Bonds outstanding and a contract for deed which totaled $203 per capita. -10- 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 culture and recreation. The following graph displays the City’s General Fund trends of financial position and changes in the volume of financial activity. Fund balance and cash balance are typically used as indicators of financial health or equity, while annual expenditures are often used to measure the size of the operation. $– $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 2003200420052006200720082009 General Fund Financial Position Year Ended December 31, Fund Balance Cash Balance (Including Interfund Borrowing)Expenditures The City’s General Fund cash and investments balance (including interfund borrowing) at December 31, 2009 was $7,872,522, which decreased about $1,248,000 from 2008. Total fund balance at December 31, 2009 was $5,097,633, down $1,080,919 from the prior year. Of this total fund balance, $3,827,941 was reserved or designated for particular purposes and $1,269,692 was undesignated. This fund balance level represents approximately 63 percent of the City’s annual General Fund expenditures, based on 2009 expenditure levels. Having an appropriate fund balance 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 financial position also 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. -11- The following graph reflects the City’s General Fund reliance on its revenue sources for 2009: Other Charges for Services Intergovernmental Licenses/Permits Property Taxes General Fund Revenue Budget Actual Total General Fund revenues for 2009 were $7,005,965, which was $32,522 (0.5 percent) under the final budget. Property taxes were less than budget by $165,697, mostly due to increases in delinquent and unpaid local property taxes. License and permit revenues were under budget by $325,103 mostly related to the decrease in the amount of storm damaged homes needing repair and replacement permits and a downturn on the national, state, and local economic conditions. Charges for services were over budget by about $302,815, mostly due to city development cost reimbursements being about $127,000 over budgeted amounts. The following graph presents the City’s General Fund revenue sources for the last seven years. The graph reflects the City’s increasing reliance on taxes and user fees to finance its General Fund operations. $– $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 $5,500,000 $6,000,000 2003200420052006200720082009 General Fund Revenue by Source Year Ended December 31, Taxes Intergovernmental Other Overall, General Fund revenues decreased $379,472 (5.3 percent) from the previous year. The largest decline was in licenses and permits which declined almost $650,000. Property taxes also declined by over $350,000 due to a lower tax levy as well as the increase in delinquent tax amounts. Charges for services increased about $382,000. The increases in this area were in a number of areas, including engineering fees, garbage fees, development costs, and inspection fees. -12- The following illustrations provide you with the components of the City’s General Fund spending for 2009 and for the past seven years: $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 OtherCulture and Recreation Public WorksPublic SafetyGeneral Government General Fund Expenditures Year Ended December 31, Actual Budget Total General Fund expenditures for 2009 were $8,060,685, which was $903,084 (12.6 percent) over the final budget. The largest variances are related to the capital outlay categories. The general government capital outlay budget was $762,200 over budgeted amounts due to a land acquisition in fiscal 2009. Public safety capital outlay was over budget by $338,070 due to some of the cost of a new fire truck purchased in fiscal 2009 being budgeted in prior years. $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 2003200420052006200720082009 General Fund Expenditures by Function Year Ended December 31, General Governmental Public Safety Public Works Culture and Recreation Other Overall, General Fund expenditures increased $1,253,745 (18.4 percent) from the prior year. General government expenditures increased about $832,584 which was mainly due to a land acquisition discussed earlier on this page. Public safety increased $524,765 mainly due to the purchase of the fire truck discussed earlier on this page. -13- ENTERPRISE FUNDS The enterprise funds comprise a considerable portion of the City’s activities. These funds help to defray overhead and administrative costs and provide additional support to general government operations by way of annual transfers. We understand that the City is proactive in reviewing these activities on an ongoing basis and we want to reiterate the importance of continually monitoring these operations. Over the years we have emphasized to our city clients the importance of these utility operations being self-sustaining, preventing additional burdens on general governmental funds. This would include the accumulation of net assets for future capital improvements and to provide a cushion in the event of a negative trend in operations. Water Enterprise Fund At December 31, 2009, the Water Enterprise Fund had a cash balance of $2,575,314 and net assets of $12,510,429. Net assets consisted of $9,622,049 in amounts invested in capital assets and $2,888,380 in unrestricted net assets. $– $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 2003200420052006200720082009 Water Enterprise Fund Year Ended December 31, Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation Water Enterprise Fund operating revenues for 2009 were $963,593, which were $28,839 lower than the previous year. Most of this decrease is related to a decline in overall water usage. 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. -14- Sewer Enterprise Fund At December 31, 2009, the Sewer Enterprise Fund had a cash balance of $1,801,578 and net asset balance of $20,281,683. Net assets consisted of $18,140,685 invested in capital assets, net of related debt and $2,140,998 of unrestricted net assets. $(200,000) $– $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 $2,200,000 2003200420052006200720082009 Sewer Enterprise Fund Year Ended December 31, Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation Sewer Enterprise Fund operating revenues for 2009 were $1,403,101, which is $64,902 more than the previous year. Most of this increase relates to an increase in sewer rates. Operating income before depreciation was $376,003 in 2009. 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 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. -15- LIQUOR ENTERPRISE FUND The following graph presents seven years of operating results for the Liquor Enterprise Fund: $– $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 2003200420052006200720082009 Liquor Enterprise Fund Year Ended December 31, Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Enterprise Fund ended 2009 with net assets of $3,129,315, an increase of $298,743 from the prior year. Of the net asset balance, $432,245 represents the investment in liquor capital assets, leaving $2,697,070 of unrestricted net assets. Liquor sales for 2009 were $4,354,030, an increase of $268,348 (6.6 percent) from last year. Sales have steadily increased over the last several years, increasing by about 29.0 percent since 2003. The Liquor Enterprise Fund generated a gross profit of $1,043,256 in 2009 or about 24.0 percent of gross sales. The Liquor Enterprise Fund’s gross profit margin has been similar for the last several years, ranging from 24.0 percent to 26.6 percent between 2003 and 2009. Operating expenses for 2009 were $669,940, an increase of $49,197 or 7.9 percent higher than last year mainly due to increases in personnel costs. -16- Fiber Optics Fund In 2007, the City started its Fiber Optics Project, which will run a fiber optic system to every premise in the City to provide customers with phone, high-speed internet, and cable television services as a self-supporting system with competitive pricing which will act as an economic development tool for the City. The project was still in the startup phase as of the year ended 2009. At December 31, 2009, the Fiber Optics Fund had a deficit cash balance (including interfund borrowing) of $3,475,044 and a deficit net asset balance of ($3,795,159). Net assets consisted of $1,102,016 invested in capital assets, net of related debt and a deficit of ($4,897,175) of unrestricted net assets. We recommend that the City continue to monitor this fund balance deficit. We also recommend as part of the annual budget process that the City approve a financial plan for the elimination of this fund balance deficit. CAPITAL PROJECT FUNDS At December 31, 2009, the City’s Capital Project Fund has a deficit fund balance which totals $2,124,391. Most of this deficit relates to costs on the Interchange Project that remain unfunded at December 31, 2009. This is an increase of $284,913 over fiscal 2008. We recommend that the City address this fund balance deficit by approving a financial plan for meeting eliminating this fund balance deficit. -17- GOVERNMENT-WIDE FINANCIAL STATEMENTS The City’s financial statements include fund-based information that focuses on budgetary compliance, and the sufficiency of the City’s current assets to finance its current liabilities. The Governmental Accounting Standards Board (GASB) Statement No. 34 reporting model also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. Statement of Net Assets The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Assets divides the net assets into three components: • Invested in Capital Assets, Net of Related Debt – The portion of net assets reflecting equity in capital assets (i.e. capital assets minus related debt). • Restricted Net Assets – The portion of net assets equal to resources whose use is legally restricted minus any non-capital-related liabilities payable from those same resources. • Unrestricted Net Assets – The residual balance of net assets after the elimination of invested in capital assets, net of related debt and restricted net assets. The following table presents the City’s net assets as of December 31, 2009 for governmental activities and business-type activities: GovernmentalBusiness-Type ActivitiesActivities Total Net assets 50,378,271$ 24,988,321$ 75,366,592$ Net book value of capital assets74,188,401 37,120,792 111,309,193 Current liabilities (4,175,182) (1,984,127) (6,159,309) Long-term liabilities (40,807,766) (27,348,922) (68,156,688) Total net assets 79,583,724$ 32,776,064$ 112,359,788$ Net assets Invested in capital assets, net of related debt 33,712,370$ 29,910,696$ 63,623,066$ Restricted17,688,193 19,350 17,707,543 Unrestricted28,183,161 2,846,018 31,029,179 Total net assets 79,583,724$ 32,776,064$ 112,359,788$ The City’s total net assets at December 31, 2009 were $1,669,702 lower than at the beginning of the year. A large portion of this decrease was due to the significant decline in net assets related to the fiber optics project which totaled $2.8 million. -18- Statement of Activities The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net assets. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in net assets of the City for the year ended December 31, 2009: ExpensesProgram Revenue Net Difference Governmental activities 1,780,972$ 464,100$ (1,316,872)$ 2,849,272 1,270,038 (1,579,234) 3,827,501 1,753,062 (2,074,439) 2,828,152 1,119,204 (1,708,948) 547,160 167,119 (380,041) 842,819 348,823 (493,996) 1,673,431 – (1,673,431) Business-type activities 1,018,098 1,019,390 1,292 2,074,447 1,371,776 (702,671) 669,940 1,043,256 373,316 27,530 19,995 (7,535) 2,792,813 – (2,792,813) 20,932,135$ 8,576,763$ (12,355,372) General revenues Taxes 8,870,085 General aids and grants 406,735 Investment earnings 958,356 Other revenues 450,494 10,685,670 (1,669,702)$ Total general revenues Change in net assets Fiber Optic Water Sewer Liquor Cemetery Culture and recreation Interest on long-term debt Net (expense) revenue General government Public safety Public works Sanitation Economic development 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 City’s governmental operations tend to rely more heavily on general revenues, such as property taxes and unrestricted grants. In contrast, the City’s business-type activities tend to rely more heavily on program revenues like charges for services (sales) and program specific grants to cover expenses. This is critical given the current external downward pressures on general revenue sources such as taxes and state aids. -19- ACCOUNTING AND AUDITING UPDATES 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 (nonspendable, restricted, committed, assigned, and unassigned) 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, capital projects, debt service, and permanent fund types are clarified by the provisions in this statement. Elimination of the reserved component of fund balance in favor of a restricted classification will 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.