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2019 Monticello Auditor's Management Report Management Report for City of Monticello, Minnesota December 31, 2019 THIS PAGE INTENTIONALLY LEFT BLANK To the City Council and Management 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 ended December 31, 2019. 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 18, 2020 C E R T I F I E D A C C O U N T A N T S 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 Jaclyn M. Huegel, CPA Kalen T. Karnowski, CPA 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 Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 THIS PAGE INTENTIONALLY LEFT BLANK -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. 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, 2019. 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, 2019: • We have 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, 2019, we performed procedures to follow-up on the findings and recommendations that resulted from our prior year audit. We reported the following findings that were corrected by the City in the current year: • Minnesota Statutes § 69.031 and § 423A.022, Subd. 2, states that annually, the commissioner of revenue shall allocate police and firefighter retirement supplemental state aid. Of the total amount appropriated as supplemental state aid, a percentage is paid to the executive director of the Public Employees Retirement Association for deposit in the Public Employees Police and Fire Retirement Fund. A percentage is then paid to municipalities that qualify to receive fire state aid in that calendar year. For municipalities that are allocated amounts for fire departments participating in the voluntary state-wide lump sum volunteer firefighter retirement plans, this balance is required to be paid to the treasurer of each municipality for transmittal within 30 days of receipt to the treasurer of the applicable volunteer firefighter relief association for deposit in its Special Fund. For the 2018 allocation of this aid to the City, the City did not pay the fire relief association prior to the 30-day period set by Minnesota Statutes. The payment of the balance required to be paid was made 37 days after receipt, 7 days beyond the 30-day requirement. We reported no such finding in the current year. -2- OTHER OBSERVATIONS AND RECOMMENDATIONS Impact of Novel Coronavirus (COVID-19) Shortly after the end of the 2019 fiscal year, the onset of the novel coronavirus (COVID-19) pandemic caused substantial volatility in economic conditions and tremendous disruption in the way governments, businesses, and individuals function. Minnesota cities may experience the impact of this pandemic in a myriad of financial areas, such as: declines in investment rates of return, cash flow issues, increased utility billing and property tax delinquencies, significant increases in the number and frequency of employees working remotely, challenges in processing general and payroll disbursements, disruption of prescribed internal control procedures, delays in internal and external financial reporting, and new compliance requirements attached to potential federal relief subsidies. As your city adapts to the new normal of municipal operations in a post-COVID-19 world, the assessment of and responses to new risks that may accompany operational changes will be critical to the safeguarding of city resources and sound financial stewardship. We encourage management and governance to include a robust financial risk assessment process when planning responses to these challenges, and to reassess and adapt internal controls over financial transactions and reporting to align with significant changes made to daily operations, even those intended to be temporary. 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 ended December 31, 2019; however, the City implemented the following governmental accounting standards during the fiscal year: • Governmental Accounting Standards Board (GASB) Statement No. 83, Certain Asset Retirement Obligations, which addressed accounting and financial reporting for certain asset retirement obligations, which are legally enforceable liabilities associated with the retirement of a tangible capital asset. • GASB Statement No. 84, Fiduciary Activities, which established new criteria for identifying and reporting fiduciary activities. • GASB Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements, which improved and clarified the information to be disclosed in notes to government financial statements related to debt, including direct borrowings and direct placements. • GASB Statement No. 90, Majority Equity Interest—an Amendment of GASB Statements No. 14 and No. 61, which improved the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and the relevance of financial statement information for certain component units. 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. -3- ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: • Depreciation – Management’s estimates of depreciation expense are based on the estimated useful lives of the assets. • Other Post-Employment Benefit (OPEB) and Pension Liabilities – The City has recorded liabilities and activity for pension benefits and other post-employment benefits (OPEB). These obligations are calculated using actuarial methodologies described in GASB Statement Nos. 68 and 75. These actuarial calculations include significant assumptions, including projected changes, healthcare insurance costs, investment returns, retirement ages, proportionate share, and employee turnover. • Land Held for Resale – These assets are stated at the lower of cost or acquisition value based on management’s estimates. • Compensated Absences – Management’s estimate is based on current rates of pay, and vacation, sick, paid time off, and compensation time balances. We evaluated the key factors and assumptions used by management to develop these estimates in determining that they are reasonable in relation to the basic financial statements taken as a whole. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The disclosures included in the notes to the basic financial statements related to OPEB and pension benefits are particularly sensitive, due to the materiality of the liabilities, and the large and complex estimates involved in determining the disclosures. The financial statement disclosures are neutral, consistent, and clear. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and comm unicate them to the appropriate level of management. There were no misstatements detected as a result of audit procedures that were material, either individually or in the aggregate, to each opinion unit’s financial statements taken as a whole. 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. -4- MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated May 18, 2020. 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), the budgetary comparison schedules, 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 prior 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. -5- 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 include 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 2018 fiscal year, local ad valorem property tax levies provided 41.5 percent of the total governmental fund revenues for cities over 2,500 in population, and 36.7 percent for cities under 2,500 in population. Total property taxes levied by all Minnesota cities for taxes payable in 2019 increased 5.6 percent from the prior year. The total tax capacity value of property in Minnesota cities increased about 7.1 percent for the 2019 levy year. The tax capacity values used for levying property taxes are based on the assessed market values for the previous fiscal year (e.g., tax capacity values for taxes levied in 2019 were based on assessed market values as of January 1, 2018), so the trend of change in these tax capacity values lags somewhat behind the housing market and economy in general. The City’s taxable market value increased 7.3 percent for taxes payable in 2018 and 0.6 percent for taxes payable in 2019. The following graph shows the City’s changes in taxable market value over the past 10 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 $1,600,000,000 $1,800,000,000 $2,000,000,000 $2,200,000,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Market Value -6- 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 6.9 percent and decreased 1.5 percent in 2018 and 2019, respectively. The decline in tax capacity for 2019 includes an increase in residential of 6.8 percent, apartments of 6.3 percent, and commercial of 2.4 percent, which is offset by a decline in the valuation of the Xcel Energy Nuclear Plant of 9.2 percent. The following graph shows the City’s change in tax capacities over the past 10 years: $– $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Net Tax Capacity The following table presents the average tax rates applied to city residents for each of the last three levy years: 2017 2018 2019 Average tax rate City 33.2 32.3 34.3 County 39.6 40.0 44.2 School 16.2 15.6 17.0 Special taxing 1.0 1.1 1.2 Total 90.0 89.0 96.7 City of Monticello Rates Expressed as a Percentage of Net Tax Capacity -7- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2019, presented both by fund balance classification and by major fund: Increase 2018 2019 (Decrease) Fund balances of governmental funds Total by classification Nonspendable 172,264$ 207,167$ 34,903$ Restricted 5,867,997 7,567,522 1,699,525 Assigned 17,145,463 21,227,605 4,082,142 Unassigned 6,984,828 6,542,111 (442,717) Total governmental funds 30,170,552$ 35,544,405$ 5,373,853$ Total by fund Major funds General 7,109,478$ 6,677,250$ (432,228)$ Community Center 606,795 239,482 (367,313) Economic Development Authority 7,240,465 7,313,264 72,799 Debt Service 2,391,544 1,821,561 (569,983) Capital Projects 7,527,500 15,200,401 7,672,901 Nonmajor funds 5,294,770 4,292,447 (1,002,323) Total governmental funds 30,170,552$ 35,544,405$ 5,373,853$ Governmental Fund Changes in Fund Balance Fund Balance as of December 31, In total, the fund balances of the City’s governmental funds increased by $5,373,853 during the year ended December 31, 2019. The majority of the increase was due to proceeds from the 2019A $8,000,000 general obligation bond issuance used to finance capital project costs related to the new fire station, a fire ladder acquisition in 2020, and other capital projects. The increase in the assigned balance was mostly due to an increase in the Capital Projects Fund from transfers from the Water and Sewage Enterprise Funds for a future new public works building. -8- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year -to-year, due to the effect of inflation and changes in its operation. Also, certain data in these tables may be classified differently than how they appear in the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of the City. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the MD&A. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. 2017 2018 2019 2,500–10,000 10,000–20,000 20,000–100,000 13,409 13,553 13,782 495$ 472$ 493$ 715$ 735$ 753$ 28 27 43 48 47 49 41 48 50 33 29 31 53 40 57 71 52 52 38 35 47 45 37 44 303 271 157 100 67 65 130 102 112 142 155 167 97 78 49 55 52 103 1,185$ 1,073$ 1,008$ 1,209$ 1,174$ 1,264$ December 31, 2018 City of Monticello Governmental Funds Revenue per Capita With State-Wide Averages by Population Class State-Wide Total revenue Year Population Property taxes Tax increments Franchise fees and other taxes Special assessments Licenses and permits Intergovernmental revenues Charges for services Other The City has generated more property tax revenue from its governmental funds compared to the average Minnesota city. The City’s per capita governmental funds revenue for 2019 was $1,264, an increase of about 7.7 percent from the prior year. Other revenue increased $51 per capita, mainly due to an increase in investment revenue as a result of higher interest rates combined with an overall increase in cash and investment balances in the governmental funds. -9- The expenditures of governmental funds will also vary from state-wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with comparative state-wide averages, are presented in the following table: 2017 2018 2019 2,500–10,000 10,000–20,000 20,000–100,000 13,409 13,553 13,782 Current 150$ 121$ 104$ 121$ 122$ 129$ 286 272 294 162 174 177 135 125 106 150 153 174 96 115 104 219 224 228 75 74 78 82 136 108 742 707 686 734 809 816 417 351 307 405 716 576 178 153 109 292 169 207 41 39 29 42 45 56 219 192 138 334 214 263 1,378$ 1,250$ 1,131$ 1,473$ 1,739$ 1,655$ Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Monticello Principal December 31, 2018 State-Wide General government Public safety Street maintenance and lighting Recreation and culture All other Total expenditures Capital outlay and construction Population Year Debt service Interest and fiscal charges Total expenditures in the City’s governmental funds for 2019 were $22,809,845, a decrease of $768,989 (3.3 percent), or $83 per capita, from the prior year. 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 per capita expenditures for capital outlay and construction decreased significantly from the prior year and will vary on a yearly basis depending on current and ongoing capital projects. -10- 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 to reflect the change in the size of the General Fund operation over the same period. 2015 2016 2017 2018 2019 Fund Balance $4,986,796 $6,276,720 $7,029,093 $7,109,478 $6,677,250 Cash Balance $5,649,254 $7,091,381 $8,130,998 $7,513,518 $7,189,488 Expenditures $6,715,369 $6,992,812 $7,442,697 $7,924,408 $8,269,524 $– $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 General Fund Financial Position Year Ended December 31, The total fund balance of the City’s General Fund decreased $432,228 in 2019, as compared to a $0 change in fund balance projected in the final budget. The decrease in the General Fund balance is mainly due to transfers out per fund balance policy during the year totaling $1,450,040. 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 Ci ty 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, street maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Taxes comprise about 72 percent of the fund’s total annual revenue. Approximately half of these revenues are received by the City in June and the rest in December. Consequently, the City needs to have adequate cash reserves to finance its everyday operations between these payments. The City’s unassigned General Fund balance at the end of the 2019 fiscal year represents approximately 79.1 percent of the City’s annual General Fund expenditures, based on 2019 expenditure levels. The City’s adopted fund balance policy requires that the City set aside fund balance to represent 75.0 percent of the subsequent years budgeted expenditures for working capital and contingencies. -11- The following graph reflects the City’s General Fund revenue sources for 2019 compared to budget: Other Charges for Services Intergovernmental Licenses and Permits Property Taxes General Fund Revenue Budget and Actual Budget Actual Total General Fund revenues for 2019 were $9,232,996, which was $671,996 (7.8 percent) over the final budget. As reflected in the table above, other revenue exceeded budgeted amounts by $309,338, due to better than expected performance on investments and conservative budgeting for contributions and reimbursements. Licenses and permits also exceeded budgeted amounts by $198,225, as a result of conservative budgeting. 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. Taxes Intergovernmental Other 2015 $5,906,255 $354,679 $1,376,712 2016 $6,204,429 $389,005 $1,678,122 2017 $6,384,444 $429,697 $1,679,204 2018 $6,634,769 $428,443 $1,626,581 2019 $6,689,647 $431,004 $2,112,345 $– $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 $6,500,000 $7,000,000 General Fund Revenue by Source Year Ended December 31, The graph reflects the City’s reliance on taxes to finance its General Fund operations. Overall, General Fund revenues increased $543,203 (6.3 percent) from the previous year. The increase was mostly in other revenues for charges for services, licenses and permits, and investment earnings. -12- The following graph illustrates the components of General Fund spending for 2019 compared to budget: Other Recreation and Culture Public Works Public Safety General Government General Fund Expenditures Budget and Actual Budget Actual Total General Fund expenditures for 2019 were $8,269,524, which was $316,476 (3.7 percent) under budget. The public works area was under budget by $170,591, mainly due to savings from hiring an internal engineer and lower fuel costs. The following graph presents the City’s General Fund expenditures by function for the last five years: General Governmental Public Safety Public Works Recreation and Culture Other 2015 $1,465,458 $1,972,986 $1,709,063 $964,385 $603,477 2016 $1,489,892 $2,036,777 $1,802,884 $1,021,709 $641,550 2017 $1,617,680 $2,178,728 $1,904,391 $1,124,379 $617,519 2018 $1,656,557 $2,354,453 $2,079,091 $1,200,388 $633,919 2019 $1,777,352 $2,449,765 $2,222,034 $1,209,429 $610,944 $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 General Fund Expenditures by Function Year Ended December 31, Overall, General Fund expenditures increased $345,116 (4.4 percent) from the prior year. The increase in General Fund expenditures in 2019 is spread across nearly every function, with the largest change in public works of $142,943, due to costs for streets, and snow and ice removal. -13- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which includes the Water Utility, Sewage Utility, Water Quality, Liquor Operations, Fiber Optics, and Deputy Registrar Funds. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2019, presented both by classification and by fund: Increase 2018 2019 (Decrease) Net position of enterprise funds Total by classification Net investment in capital assets 39,250,211$ 42,808,003$ 3,557,792$ Unrestricted 13,166,083 14,737,604 1,571,521 Total enterprise funds 52,416,294$ 57,545,607$ 5,129,313$ Total by fund Water 14,782,772$ 13,940,622$ (842,150)$ Sewage 22,110,771 22,459,035 348,264 Water Quality – 6,518,374 6,518,374 Liquor 1,776,378 522,808 (1,253,570) Fiber Optics 12,643,701 12,464,870 (178,831) Deputy Registrar 1,102,672 1,639,898 537,226 Total enterprise funds 52,416,294$ 57,545,607$ 5,129,313$ 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 $5,129,313 during the year ended December 31, 2019. The increase in the net investment in capital assets relates to depreciation expense being less than the payments on the related debt. This increase also occurred as a result of a transfer of related capital assets into the Water Quality Enterprise Fund totaling $5,029,427. The increase in unrestricted net position is a result of positive operations in these funds and a transfer into the new Water Quality Enterprise Fund totaling $1,426,818. -14- WATER ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Water Enterprise Fund: 2015 2016 2017 2018 2019 Oper Rev $1,126,718 $1,172,258 $1,415,441 $1,432,194 $1,300,191 Oper Exp $1,105,230 $1,172,236 $1,160,339 $1,238,586 $1,220,145 Oper Inc Before Dep $535,302 $502,469 $778,909 $712,808 $603,219 $– $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 $1,200,000 $1,300,000 $1,400,000 $1,500,000 Water Enterprise Fund Year Ended December 31, The Water Enterprise Fund ended 2019 with a total net position of $13,940,622, a decrease of $842,150 from the prior year. Of this, $9,075,141 represents the net investment in capital assets, leaving unrestricted net position of $4,865,481. Operating revenue in the Water Enterprise Fund is $1,300,191, a decrease of $132,003, or 9.2 percent, from the prior year, due mostly to lower consumption. Operating expenses for 2019 were $1,220,145, a decrease of $18,441, or 1.5 percent. It is important that this fund continue to 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 water rates so that they are designed to also provide for future repairs and replacement of the infrastructure assets. -15- SEWAGE ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Sewage Enterprise Fund: 2015 2016 2017 2018 2019 Oper Rev $2,083,122 $2,223,252 $2,472,774 $2,581,833 $2,443,856 Oper Exp $2,582,554 $2,554,310 $2,644,096 $2,857,968 $2,819,825 Oper Inc Before Dep $603,965 $811,421 $920,157 $907,405 $847,142 $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 $2,750,000 $3,000,000 Sewage Enterprise Fund Year Ended December 31, The Sewage Enterprise Fund ended 2019 with a total net position of $22,459,035, an increase of $348,264 from the prior year. Net position consisted of $16,571,532 in net investment in capital assets and $5,887,503 of unrestricted net position. Operating revenue in the Sewage Enterprise Fund decreased $137,977 (5.3 percent), due to a change of rates and a decrease in usage. Operating expenses for 2019 decreased $38,143 (1.3 percent) from 2018 spread across multiple categories. It is important that this fund continue to 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 sewage rates so they are designed to also provide for future repairs and replacement of infrastructure assets. -16- WATER QUALITY ENTERPRISE FUND The City’s Water Quality Enterprise Fund was established in 2019. At December 31, 2019, the Water Quality Fund had a cash balance of $1,442,461 and a net position of $6,518,374. Net position consisted of $5,029,427 in net investment in capital assets contributed from governmental activities and $1,488,947 of unrestricted net position. Water Quality Enterprise Fund operating revenues for 2019 were $61,757, while operating expenses for 2019 were $0. The City’s Storm Sewer Access Nonmajor Capital Projects Fund transferred $1,426,818 into the Water Quality Enterprise Fund to establish the new fund. The City also transferred $5,029,427 of related capital assets from governmental activities into this fund in the current year. It is important that this fund continue to 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 water quality rates so they are designed to also provide for future repairs and replacement of infrastructure assets. -17- LIQUOR ENTERPRISE FUND The following graph presents five years of comparative operating results for the Liquor Enterprise Fund: 2015 2016 2017 2018 2019 Sales $5,489,430 $5,448,584 $5,751,197 $6,086,293 $6,374,153 Cost of Sales $3,969,587 $4,041,224 $4,230,016 $4,546,747 $4,717,441 Operating Expenses $801,545 $836,048 $880,415 $854,218 $866,171 Operating Income $722,793 $573,358 $644,735 $690,016 $793,845 $– $400,000 $800,000 $1,200,000 $1,600,000 $2,000,000 $2,400,000 $2,800,000 $3,200,000 $3,600,000 $4,000,000 $4,400,000 $4,800,000 $5,200,000 $5,600,000 $6,000,000 $6,400,000 $6,800,000 Liquor Enterprise Fund Year Ended December 31, The Liquor Enterprise Fund ended 2019 with a net position balance of $522,808, a decrease of $1,253,570 from the prior year. Of the net position balance, $105,509 represents the investment in liquor capital assets, leaving $417,299 of unrestricted net position. Liquor sales for 2019 were $6,374,153, an increase of $287,860 from last year. The Liquor Enterprise Fund generated a gross profit of $1,656,712 in 2019, or about 26.0 percent of gross sales, a slight increase from 25.3 percent in 2018. Operating expenses for 2019 were $866,171, an increase of $11,953 from last year. The Liquor Enterprise Fund made a transfer of $2,100,000 to governmental funds in 2019. The transfer out was for project funding for the phase 1 buildout of the Bertram Chain of Lakes Regional Park. -18- FIBER OPTICS ENTERPRISE FUND The following graph presents five years of comparative operating results for the Fiber Optics Enterprise Fund: 2015 2016 2017 2018 2019 Oper Rev $1,642,403 $1,739,566 $1,757,134 $1,736,243 $1,795,435 Oper Exp $2,429,792 $2,490,920 $2,252,287 $2,276,565 $1,990,525 Oper Inc (Loss) Before Dep $(367,607)$(331,799)$(82,234)$(141,524)$190,086 $(500,000) $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 Fiber Optics Enterprise Fund Year Ended December 31, The Fiber Optics Enterprise Fund ended 2019 with a total net position balance of $12,464,870, a decrease of $178,831 from the prior year. Of this, $11,950,888 represents the net investment in capital assets, leaving unrestricted net position of $513,982. Operating revenue in this fund was $1,795,435, an increase of $59,192, or 3.4 percent, in 2019. Operating expenses for 2019 were $1,990,525, a decrease of $286,040 or 12.6 percent, from last year. In 2018, this fund completed a fiber optics project for the Fallon Avenue overpass, which caused one-time relocation expenses. In 2019, the operating income in this fund before depreciation was $190,086. This operating income was higher by $331,610 in the current year, mostly related to decreased operating expenses, as explained above. It is important that this fund continue to have positive operating results so as not to place an additional burden on other city funds. We recommend the City continue to monitor the financial results of this fund. The continued monitoring of this fund would include a discussion on how the current financial results compare to the future strategic plan for this fund. -19- DEPUTY REGISTRAR ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Deputy Registrar Enterprise Fund: 2015 2016 2017 2018 2019 Oper Rev $535,931 $562,891 $594,777 $694,263 $953,855 Oper Exp $318,686 $352,117 $398,054 $429,683 $466,499 Oper Inc (Loss) Before Dep $220,430 $213,959 $201,132 $268,985 $495,245 $– $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000 $700,000 $750,000 $800,000 $850,000 $900,000 $950,000 $1,000,000 $1,050,000 Deputy Registrar Enteprise Fund Year Ended December 31, The Deputy Registrar Enterprise Fund ended 2019 with a total net position balance of $1,639,898, an increase of $537,226. Of this, $75,506 represents net investment in capital assets, leaving unrestricted net position of $1,564,392. Deputy Registrar Enterprise Fund operating revenues for 2019 were $953,855, which is $259,592 more than the previous year, due to an increase in charges for services and other revenue from the state of Minnesota for software-related transition costs. Operating expenses for 2019 were $466,499, which is $36,816 higher than 2018, due to increased personal services. THIS PAGE INTENTIONALLY LEFT BLANK -20- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net position is divided into three components: net investment in capital assets, restricted, and unrestricted. The following table presents the components of the City’s net position as of December 31, 2019 and 2018, for governmental activities and business-type activities: Increase 2019 2018 (Decrease) Net position Governmental activities Net investment in capital assets 40,008,410$ 43,517,983$ (3,509,573)$ Restricted 8,690,172 9,649,085 (958,913) Unrestricted 27,133,699 23,422,548 3,711,151 Total governmental activities 75,832,281 76,589,616 (757,335) Business-type activities Net investment in capital assets 42,808,003 39,250,211 3,557,792 Unrestricted 14,855,640 13,261,505 1,594,135 Total business-type activities 57,663,643 52,511,716 5,151,927 Total net position 133,495,924$ 129,101,332$ 4,394,592$ December 31, The City’s total net position at December 31, 2019 was $4,394,592 more than the prior year. Of the increase, $5,151,927 came from business-type activities, which was offset by a $757,335 decrease in governmental activities. The decrease in governmental activities net investment in capital assets and the increase in the business-type activities net investment in capital assets, is the result of a transfer of $5,029,427 in capital assets from the governmental activities to the new Water Quality Enterprise Fund. Governmental activities restricted net position decreased $958,913, due mostly to the use of restricted assets for capital improvements. Unrestricted net position in governmental activities increased, due mostly to $4,233,000 in transfers from enterprise funds. The increase in the unrestricted business-type activities net position relates to a transfer of $1,426,818 from governmental funds to the new Water Quality Enterprise Fund. At the end of the current fiscal year, the City is able to present positive balances in all three categories of net position, both for the government as a whole, as well as for its separate governmental and business-type activities. The same situation held true for the prior year. -21- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in the net position of the City for the years ended December 31, 2019 and 2018: 2018 Program Expenses Revenues Net Change Net Change Net (expense) revenue Governmental activities General government 1,927,752$ 272,577$ (1,655,175)$ (1,399,962)$ Public safety 2,406,748 1,134,795 (1,271,953) (1,382,386) Public works 5,765,576 1,556,611 (4,208,965) (3,111,667) Sanitation 610,944 401,073 (209,871) (426,271) Transit – – – (18,333) Recreation and culture 3,636,958 1,602,473 (2,034,485) (1,817,554) Economic development 872,984 14,149 (858,835) (1,203,235) Interest and fiscal charges 752,595 – (752,595) (617,344) Business-type activities Water 1,216,446 1,727,027 510,581 522,779 Sewage 2,889,438 3,663,143 773,705 248,975 Water Quality – 61,757 61,757 – Liquor 5,577,481 6,377,457 799,976 696,013 Fiber Optics 1,990,052 1,795,435 (194,617) (539,772) Deputy Registrar 458,695 953,855 495,160 272,601 Total net (expense) revenue 28,105,669$ 19,560,352$ (8,545,317) (8,776,156) General revenues Property taxes and tax increments 11,055,639 10,610,444 Investment earnings 1,451,336 526,367 Other revenues 432,934 780,868 Total general revenues 12,939,909 11,917,679 Change in net position 4,394,592$ 3,141,523$ 2019 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 and unrestricted grants. It also shows that the City’s business-type activities are, for the most part, 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. -22- LEGISLATIVE UPDATES The 2019 legislative session began with a projected state general fund surplus of $1.052 billion. The legislative agenda was primarily focused on setting an operating budget for the state’s fiscal 2020-2021 biennium. At the end of the regular session, only a higher education budget bill had been completed. However, after a special session, the Legislature was able to address the 11 remaining budget bills, as well as pass an omnibus tax bill and small pension bill. The following is a brief summary of specific legislative changes from the 2019 session or previous legislative sessions potentially impacting Minnesota cities. Local Government Aid (LGA) – An additional $26 million was added to the appropriation for the city LGA formula beginning in fiscal 2020, bringing the total state-wide appropriation to $560.4 million. An additional $4 million was added to the appropriation beginning in fiscal 2021. The LGA distribution formula for 2020 was altered to provide that a city’s 2020 LGA may not be less than its 2019 aid, and the cap on maximum aid losses in any year thereafter was modified. Bonding Bill – The 2019 bonding bill provided financing for approximately $102 million of projects and funding authorized by the 2018 omnibus bonding bill, which had been legally challenged due to their reliance on the use of the Environment and Natural Resources Trust Fund to generate appropriation bonds. The 2019 Legislature changed the funding source for these projects to general obligation bonds, clearing the way for the projects to go forward. Included in this was $59 million earmarked for city water and wastewater projects through the state Public Facilities Authority. Local Option Sales Tax Process – Effective May 1, 2019, the process for cities to enact a local option sales tax have been modified, requiring special legislation prior to a local referendum vote. Cities must now adopt a resolution specifying the proposed sales tax rate and time frame for the sales tax. The resolution must also include a detailed description of the project or projects (up to five) to be funded by the sales tax, the amount to be raised for each project, and documentation of the region al significance of each project. The resolution must be submitted to the House and Senate tax committee chairs by January 31st to be considered for special legislation by the State Legislature. If special legislation is approved, voter approval must be obtained by referendum at a general election within two years of legislative approval. Wage Theft – The Legislature enacted a number of changes in employment law aimed at reducing wage theft by employers. The changes require employers to provide written notice to new employees of specific wage information including rate of pay, allowances, paid leave, deductions, days in a pay period, and the employer’s legal name, address, and phone number. Employers must also provide an earnings statement that includes similar information. The changes also create new requirements for employer recordkeeping for hours worked each day and each workweek, and imposes penalties for failure to do so and for refusal to make the records available for inspection by the Department of Labor. Written Estimates of Consulting Fees – Effective August 1, 2019, upon request by applicants for a permit, license, or other approval relating to real estate development or construction, cities are required to provide a written, nonbinding estimate of consulting fees to be charged to the applicant based on information available at that time. The related application will not be considered complete until the city has provided the estimate, received the required application fees, and received the applicant’s signed acceptance of the fee estimate along with a signed statement that the applicant has not relied on the fee estimate in its decision to proceed with the application. Contract Retainage – Effective for contracts entered into August 1, 2019 or later, contract retainage must be released no later than 60 days after the related construction project reaches substantial completion as defined by statute. After substantial completion, cities can still withhold amounts equal to, 1) 250 percent of the cost to correct or complete work known at the time of substantial completion, and 2) the greater of $500 or 1 percent of the value of the contract pending the completion of “final paperwork,” including documents required to fulfill contractual obligations such as operating manuals, payroll documents for projects subject to prevailing wage requirements, and contractor payroll tax withholding affidavits. Any resulting reduction in retainage must be passed from the contractor to all subcontractors at the same rate. -23- Driver and Vehicle Registration System (VTRS) – The Legislature selected VTRS, a third party vendor system, to replace the failed Minnesota Licensing and Registration System (MNLARS). Fees from driver’s licenses, license plates, and filing fees were increased and a technology surcharge imposed on vehicle registration renewals to pay for the implementation of VTRS, the decommissioning of MNLARS, and to temporarily increase the capacity of Driver and Vehicle Services to meet public service needs. Included in this is $13 million appropriated in 2019 for reimbursement grants to deputy registrars for costs related to MNLARS. The grants, which would be determined by formula, would require the deputy registrar accepting the grant to release the state from any further liability or claims related to MNLARS. Vaping Ordinance Authority – Effective July 1, 2019, cities are allowed to enact and enforce ordinances with more stringent measures than the Minnesota Clean Indoor Air Act to protect individua ls from involuntary exposure to aerosol or vapor from electronic delivery devices. Water Connection Fees – Effective January 1, 2020, the annual water connection fees cities are required to collect on behalf of the Minnesota Department of Health for water testing and support has been increased from $6.36 to $9.72. Military Exception to Open Meeting Law – Effective August 1, 2019, members of a public body that are in the military will be allowed to participate in public meetings via interactive television when they are at a required drill, deployed, or on active duty. The member may participate under this exception up to three times a year. Pension Plan Changes – The 2019 pension bill included several changes to the various pension plans throughout the state: • Changes to plans administered by the Public Employees Retirement Association (PERA) included: o The rights of PERA General Employees Retirement Fund (GERF) plan and Public Employees Police and Fire Fund (PEPFF) plan members to purchase service credit for periods of military leave were expanded. This gives plan members the right to purchase up to five years of service credit for military service leave t hat is not federally protected because the service occurred prior to public employment or the member did not meet the payment deadlines applicable to federally protected leave service credit purchases. o The Phased Retirement Option (PRO) program, which gives cities an opportunity to retain potentially retiring employees that are GERF plan members aged 62 or over, was altered and made permanent. Under a PRO arrangement, an employee would begin collecting a retirement annuity, but could continue working for their current employer for up to five years if they agree to a work schedule that represents a reduction of at least 25 percent each pay period from their current schedule, up to a maximum of 1,044 hours per year. Employees would not be allowed to contribute to a pension benefit plan or accrue additional service time while working under a PRO. o A process was established for municipalities and joint powers entities to terminate participation in the PERA Statewide Volunteer Firefighter (SVF) plan if, 1) the entity has either eliminated its fire department or ceased using the services of all departing firefighters and any other noncareer or volunteer firefighters, and 2) the entity’s account has assets sufficient to cover all liabilities including the fully vested liabilities for all departing firefighters and administrative expenses. -24- • Changes impacting volunteer firefighter relief associations (VRFAs) included: o Effective January 1, 2020, vesting schedules for defined contribution plans cannot require that a member have more than 20 years of active service to become 100 percent vested in the member’s account, or provide for a larger vesting percentage with respect to the completed years of service than as provided in the statutory schedule. o Effective January 1, 2020, the permitted graded vesting schedule for defined benefit pension plans is reduced from 20 years to 10 years for full vesting. Also, plans cannot require that a member have more than 20 years of active service to become 100 percent vested in the member’s accrued service pension, or provide for a larger vesting percentage with respect to the completed years of service than as provided in the statutory schedule. o Effective January 1, 2020, supplemental benefits are allowed to be pa id to designated beneficiaries or estates when plan members have no surviving spouse or children. THIS PAGE INTENTIONALLY LEFT BLANK -25- ACCOUNTING AND AUDITING UPDATES The following is a summary of GASB standards expected to be implemented in the next few years. Due to the COVID-19 outbreak, the GASB has delayed the original implementation dates of these and other standards as described below. 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 the 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 were originally effective for reporting periods beginning after December 15, 2019 and are now effective for fiscal years beginning after June 15, 2021. GASB STATEMENT NO. 91, CONDUIT DEBT OBLIGATIONS The primary objectives of this statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the iss uer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures. -26- A conduit debt obligation is defined as a debt instrument having all of the following characteristics: • There are at least three parties involved: (1) an issuer, (2) a third party obligor, and (3) a debt holder or a debt trustee. • The issuer and the third party obligor are not within the same financial reporting entity. • The debt obligation is not a parity bond of the issuer, nor is it cross -collateralized with other debt of the issuer. • The third party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance. • The third party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments). This statement also addresses arrangements, often characterized as leases, that are associated with conduit debt obligations. In those arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by third party obligors in the course of their activities. This statement requires issuers to disclose general information about their conduit debt obligations, organized by type of commitment, including the aggregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each type of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period. The requirements of this statement were originally effective for reporting periods beginning after December 15, 2020 and are now effective after December 15, 2021. Earlier application is encouraged.