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2013 Monticello Auditor's Management Letter Management Report for City of Monticello, Minnesota December 31, 2013 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, 2013. The purpose of this report is to provide comments resulting from our audit process and to communicate information relevant to city finances in Minnesota. We have organized this report into the following sections:  Audit Summary  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 June 27, 2014 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, 2013, and the related notes to the financial statements. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you verbally and in our audit engagement letter. Professional standards also require that we communicate the following information related to our audit. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously discussed and coordinated in order to obtain sufficient audit evidence and complete an effective audit. AUDIT OPINION AND FINDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2013:  We have issued an unmodified opinion on the City’s financial statements. Our audit opinion included an emphasis of a matter paragraph to direct the financial statement readers’ attention to the discussion of the City’s default on the telecommunication bonds.  We noted one matter involving the City’s internal control over financial reporting that we considered to be material weaknesses: o During our audit, we noted a material prior period adjustment, as detailed in the notes to basic financial statements, that was necessary to adjust for special assessments to the proper balance as of December 31, 2012. Auditing standards consider the necessity of recording a material prior period adjustment to be indicative of a material weakness in the related internal controls.  The results of our testing disclosed no instances of noncompliance required to be reported under Government Auditing Standards.  We reported two findings based on our testing of the City’s compliance with Minnesota laws and regulations: o The City is required by Minnesota Statute § 412.271 to receive signed declarations for payments to employees. We noted that for several claims for payroll, mainly community center employees, the City did not receive the required signed declaration. o We noted that 1 out of 25 disbursements tested was not paid within the 35-day period as required by Minnesota Statute § 471.425. -2- 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, 2013, 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:  In the prior year, the City held two time deposits that exceeded the Federal Depository Insurance Coverage (FDIC) coverage limit, deeming them improper under Minnesota Statute § 118A.05. During this year’s audit testing, all deposits were properly insured.  In the prior year, the City entered into contracts that did not follow state statute § 471.425, which states each contract of a municipality must require the prime contractor to pay any subcontractor within 10 days of the prime contractor’s receipt of payment from the municipality for undisputed services provided by the subcontractor. The contract must require the prime contractor to pay interest of 1 1/2 percent per month to the subcontractor on any unpaid balance. During this year’s audit testing, all contracts tested complied with the state statute. OTHER RECOMMENDATIONS We offer the following observations and recommendations for the continued improvement of the City’s internal controls over financial reporting:  Information Technology (IT) 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 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. SEGREGATION OF DUTIES One important element of internal accounting controls is an adequate segregation of duties such that no one individual has responsibility to execute a transaction, have physical access to the related assets, and have responsibility or authority to record the transaction. A lack of segregation of duties subjects the City to a higher risk that errors or fraud could occur and not be detected in a timely manner in the normal course of business. A part of having adequate segregation of duties and proper internal controls is the proper cross-training of employees. This would include having secondary employees available to back up the processing of transactions in case of absence or vacation of a fellow employee. An example of where this is needed within the City is at the community center. Currently, the community center has only one employee who understands and completes the daily closeout procedure process. -3- We recommend that the City review the staffing within the community center in an effort to create adequate internal controls and proper backup employee support in all accounting and reporting functions in cases of employee absence and/or vacation. SIGNIFICANT ACCOUNTING POLICIES Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note 1 of the notes to basic financial statements. For the fiscal year ended December 31, 2013, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. GASB Statement No. 65 identified specific items previously reported as assets that will now be classified as either deferred outflows of resources or outflows (expenditures/expenses), and items previously reported as liabilities that will now be reported as either deferred inflows of resources or inflows (revenues). We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. 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.  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 – These assets are stated at the lower of cost or net realizable value based on management’s estimates.  Compensated Absences – Management’s estimate is based on current rates of pay and sick leave balances.  Allowance for Doubtful Accounts – Management’s estimate of the allowance for doubtful accounts is based on historical revenues, historical loss levels, and an analysis of the collectability of individual accounts. We evaluated the key factors and assumptions used to develop these accounting estimates in determining that they are reasonable in relation to the basic financial statements taken as a whole. The financial statement disclosures are neutral, consistent, and clear. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Where applicable, management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management, when applicable, were material, either individually or in the aggregate, to each opinion unit’s financial statements taken as a whole. -4- DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. DISAGREEMENTS WITH MANAGEMENT For purposes of this report, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated June 27, 2014. 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 Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. Other information, including the introductory section, supplemental information, and statistical section, as listed in the table of contents, are presented for purposes of additional analysis and are not required parts of the basic financial statements. With respect to the supplemental information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplemental information to the underlying accounting records used to prepare the basic financial statements or to the basic financial statements themselves. With respect to the introductory section and the statistical section accompanying the basic financial statements, our procedures were limited to reading this other information and, in doing so, we did not identify any material inconsistencies with the audited financial statements. -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 includes the General Fund, special revenue, debt service, and capital project funds. These funds are used to account for the basic services the City provides to all of its citizens, which are financed primarily with property taxes. The governmental fund information in the City’s financial statements focuses on budgetary compliance, and the sufficiency of each governmental fund’s current assets to finance its current liabilities. 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 economic conditions have resulted in reductions to other revenue sources such as state aids and fees generated from property development or redevelopment. Despite these conditions, property taxes levied by Minnesota cities increased a record low 0.9 percent state-wide for 2012, and 2.27 percent for 2013. Almost one-third of Minnesota cities kept their 2013 levy at the same level as the previous year, while another 13 percent reduced their levies for 2013. Economic conditions have also had a profound effect on the tax base of Minnesota cities with state-wide taxable market values declining each of the last four levy years, including average decreases of 8.8 percent and 4.5 percent for taxes payable in 2012 and 2013, respectively. There is optimism that this trend is reversing, as the market value decline for the 2013 levy year was the smallest of the past four years. However, since the assessed valuation used for levying property taxes is based on values from the previous fiscal year (e.g. the market value for taxes payable in 2013 is based on estimated values as of January 1, 2012), taxable market value improvement has lagged behind recent upturns in the housing market and the economy in general. The City’s taxable market value decreased 6.9 percent for taxes payable in 2012, but increased 10.2 percent for taxes payable in 2013. 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 2004200520062007200820092010201120122013 Taxable 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 the City’s tax base that is in each property classification from year-to-year, as well as legislative changes to tax rates. The City’s tax capacity for taxes payable in 2012 decreased 4.4 percent and increased 17.7 percent in 2013. The following graph shows the City’s change in tax capacities over the past 10 years: $– $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 $18,000,000 $20,000,000 2004200520062007200820092010201120122013 Local Tax Capacity The following table presents the average tax rates applied to city residents for each of the last two levy years, along with comparative state-wide and metro-area rates. The general increase in rates reflects both the increased reliance of local governments on property taxes and the recent decline in tax capacities. Rates expressed as a percentage of net tax capacity 20122013 20122013 Average tax rate City 46.3 48.8 49.8 42.3 County 46.8 48.5 43.5 44.3 School27.3 28.5 28.3 26.2 Special taxing6.8 7.2 1.2 0.6 Total127.2133.0 122.8113.4 City of Monticello All Cities State-Wide The City’s portion of the tax rate has been higher than average in recent years. Fiscal 2013 is below state-wide averages as a result of improved market values and tax capacities in the current year. The increase in market values and local tax capacity in 2013 is related to significant increases to market values at the Xcel power plant. -7- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2013, presented both by fund balance classification and by fund. The data for fiscal 2012 in this document has been restated as a result of a change in fund structure, change in accounting principle, and prior period adjustment all reported in fiscal 2013. Increase 20132012, as Restated (Decrease) Fund balances of governmental funds Total by classification Nonspendable2,081,026$ 2,259,503$ (178,477)$ Restricted10,928,985 21,480,938 (10,551,953) Assigned6,485,727 8,655,488 (2,169,761) Unassigned3,656,463 3,044,716 611,747 Total governmental funds 23,152,201$ 35,440,645$ (12,288,444)$ Total by fund Major funds General3,914,563$ 3,478,507$ 436,056$ Special revenue funds Community Center271,204 179,500 91,704 Economic Development Authority7,115,305 7,461,554 (346,249) Debt Service Fund2,750,079 12,952,896 (10,202,817) Capital projects funds Capital Outlay Revolving– 1,945,695 (1,945,695) Sanitary Sewer Access– 1,866,876 (1,866,876) Capital Projects3,479,694 1,911,603 1,568,091 Nonmajor funds5,621,356 5,644,014 (22,658) Total governmental funds 23,152,201$ 35,440,645$ (12,288,444)$ Governmental Fund Changes in Fund Balance Fund Balance as of December 31, As reflected in the table above, total governmental fund balance decreased by $12,288,444. The decrease was due to bond refunding payments of $10,690,000 in fiscal 2013. The decline in the Capital Outlay Revolving and Sanitary Sewer Access Funds’ balances relates to closing these funds in the current year and transferring the fund balances to other funds. -8- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as the City’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year-to-year due to the effect of inflation and changes in the City’s operation. Also, certain data on these tables may be classified differently than how it appears on the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management’s Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Year 201120122013 Population2,500–10,000 10,000–20,000 20,000–100,000 12,75912,93512,964 Property taxes414$ 382$ 416$ 572$ 637$ 616$ Tax increments32 44 46 82 79 75 Franchise fees and other taxes29 36 30 27 26 25 Special assessments60 54 62 145 147 159 Licenses and permits24 24 35 20 21 26 Intergovernmental revenues278 279 138 112 42 98 Charges for services104 81 83 176 161 142 Other66 58 50 162 119 40 Total revenue1,007$ 958$ 860$ 1,296$ 1,232$ 1,181$ December 31, 2012 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 2013 was $1,181, a decrease of about 4.1 percent from the prior year. Property taxes decreased $21 per capita as the City had significant delinquent tax collections in fiscal 2012. This decrease is offset by an increase in intergovernmental revenues of $56 per capita due to a significant portion of revenues received for specific projects. Other revenue also decreased $79 per capita, mainly as a result of a negative market value adjustment on the City’s investment portfolio in 2013. -9- The expenditures of governmental funds will also vary from state-wide averages and from year-to-year based on the City’s circumstances. Expenditures are classified into three types as follows:  Current – These are typically the general operating-type expenditures occurring on an annual basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.  Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, which are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects.  Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Year 201120122013 Population2,500–10,000 10,000–20,000 20,000–100,000 12,75912,93512,964 Current 127$ 101$ 84$ 160$ 156$ 122$ 234 229 241 135 134 139 114 105 92 131 132 132 82 95 86 190 176 191 73 75 92 133 101 117 630$ 605$ 596$ 749$ 699$ 701$ Capital outlay and construction315$ 312$ 221$ 319$ 219$ 105$ Debt service 187$ 135$ 103$ 381$ 400$ 408$ 58 46 39 108 100 72 245$ 181$ 142$ 489$ 500$ 480$ Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Monticello Principal December 31, 2010 State-Wide Interest and fiscal General government Public safety Street maintenance and lighting Culture and recreation All other 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 will vary on a yearly basis depending on current, ongoing capital projects. Debt service costs are significantly higher than other cities state-wide due to the stage of development of the City. -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 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. $– $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 $7,500,000 $8,000,000 $8,500,000 20062007200820092010201120122013 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, 2013 was $4,020,940, which increased $438,353 from 2012. Total fund balance at December 31, 2013 was $3,914,563, up $436,056. This fund balance level represents approximately 61.0 percent of the City’s annual General Fund expenditures, based on 2013 expenditure levels. The City’s adopted fund balance policy requires that the City set aside fund balance to represent 45 percent of expenditures for working capital and contingencies. 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 illustrations provide you with the components of the City’s General Fund revenue compared to budget for 2013: Other Charges for Services Intergovernmental Licenses and Permits Property Taxes General Fund Revenue Budget to Actual Budget Actual Total General Fund revenues for 2013 were $6,948,946, which was $161,977 (2.4 percent) over the final budget. Property taxes were over budget by $45,602, mostly due to collections of prior year delinquencies and lower abatements than allowed for in the budget. Other revenues also exceeded budgeted amounts by $125,474 as a result of receiving a higher than budgeted insurance dividend. The following graph presents the City’s General Fund revenue sources for the last five years. The graph reflects the City’s increasing reliance on taxes and user fees to finance its General Fund operations. $– $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 TaxesIntergovernmentalOther General Fund Revenue by Source Year Ended December 31, 2009 2010 2011 2012 2013 Overall, General Fund revenues decreased $364,402 (5.0 percent) from the previous year. Property taxes decreased $131,557 due to a decrease in the amount of delinquent tax collections. Other revenues declined $303,581 due to a significant insurance claim received in 2012 and the market value decline on investments reported in the current year. -12- The following graphs illustrate the components of General Fund spending for 2013 compared to budget: General Governmental Public Safety Public Works Culture and Recreation Other General Fund Expenditures Budget to Actual Budget Actual Total General Fund expenditures for 2013 were $6,420,890, which was $286,079 (4.3 percent) under budget. The public works area was under budget by $249,444 due to decreased personnel services from department turnover. The following illustrations provide you with the components of the City’s General Fund spending compared to budget for 2013 and by function for the past four years: $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 General Governmental Public SafetyPublic WorksCulture and Recreation Other General Fund Expenditures by Function Year Ended December 31, 2010 2011 2012 2013 Overall, General Fund expenditures decreased $89,778 (1.4 percent) from the prior year. General government expenditures decreased $157,279, which was mainly due to the reallocation of IT and central equipment charges to newly created internal service funds. -13- ENTERPRISE FUNDS OVERVIEW The City maintains a number of enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which includes the Water Utility, Sewage Utility, Liquor Operations, Deputy Registrar, and Fiber Optics Funds. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2013, presented both by classification and by fund. The data for fiscal 2012 in this document has been restated as a result of a change in fund structure, change in accounting principle, and prior period adjustment all reported in fiscal 2013. Increase 20132012, as Restated (Decrease) Net position of enterprise funds Total by classification Net investment in capital assets20,496,832$ 22,687,306$ (2,190,474)$ Unrestricted6,461,685 7,726,250 (1,264,565) Total enterprise funds 26,958,517$ 30,413,556$ (3,455,039)$ Total by fund Water15,220,444$ 15,462,946$ (242,502)$ Sewage22,564,278 23,072,290 (508,012) Liquor979,250 1,008,519 (29,269) Fiber Optics(12,030,506) (9,270,192) (2,760,314) Deputy Registrar225,051 139,993 85,058 Total enterprise funds 26,958,517$ 30,413,556$ (3,455,039)$ Enterprise Funds Change in Financial Position Net Position as of December 31, In total, the net position of the City’s enterprise funds decreased by $3,455,039 (excluding change in accounting principle) during the year ended December 31, 2013. The significant loss of about $3.6 million in the Fiber Optics Fund contributed to the overall decrease. Depreciation expense on capital assets in excess of current year payments on outstanding debt reduced the overall net investment in capital assets in enterprise fund operations. The Sewage Fund operating decline relates to depreciation on capital assets of over $1,100,000, which is only partially funded by sewage fees. -14- WATER ENTERPRISE FUND The following graph presents 10 years of comparative operating results for the City’s Water Enterprise Fund: $– $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 2004200520062007200820092010201120122013 Water Enterprise Fund Year Ended December 31, Operating Revenue Operating Expense Operating Income Before Depreciation At December 31, 2013, the Water Enterprise Fund had a cash balance of $4,267,193 and net position of $15,220,444. Net position consisted of $10,652,946 in net investment in capital assets and $4,567,498 in unrestricted net position. Operating revenue in the Water Enterprise Fund is $1,239,083, a decrease of $95,362 from the prior year. This decrease is related to the City implementing a rate increase in its billing structure, which is offset by a significant decrease in consumption. Water Enterprise Fund operating expenses for 2013 were $1,009,876, a decrease of $108,913, which is spread across all expenditure categories in this fund. As shown in the above graph, operating income before depreciation has been steadily increasing over the past few years. 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 10 years of comparative operating results for the City’s Sewage Enterprise Fund: $(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 $2,400,000 $2,600,000 2004200520062007200820092010201120122013 Sewage Enterprise Fund Year Ended December 31, Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation At December 31, 2013, the Sewage Enterprise Fund had a cash balance of $4,328,991 and net position balance of $22,564,278. Net position consisted of $18,796,893 in net investment in capital assets and $3,767,385 of unrestricted net position. Sewage Enterprise Fund operating revenues for 2013 were $2,006,718, which is $131,367 more than the previous year. Most of this increase relates to an increase in sewage rates, which is offset by a significant decrease in consumption. Operating expenses for 2013 were $2,383,924, which is $75,008 lower than 2012. This decrease is due to the decrease in uncollectable accounts for sewage services. 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 sewage rates so they are designed to also provide for future repairs and replacement of infrastructure assets. -16- LIQUOR ENTERPRISE FUND The following graph presents 10 years of operating results for the Liquor Enterprise Fund: $– $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 2004200520062007200820092010201120122013 Liquor Enterprise Fund Year Ended December 31, Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Enterprise Fund ended 2013 with net position of $979,250, a decrease of $29,269 from the prior year. Of the net position balance, $311,712 represents the investment in liquor capital assets, leaving $667,538 of unrestricted net position. Liquor sales for 2013 were $5,085,924, an increase of $231,126 (4.8 percent) from last year. Sales have steadily increased over the last several years, increasing by about 49.0 percent since 2004. The Liquor Enterprise Fund generated a gross profit of $1,318,276 in 2013, or about 25.9 percent, of gross sales. The Liquor Enterprise Fund’s gross profit margin has been improving over the last two years after a profit margin of 24.7 in fiscal 2011. Operating expenses for 2013 were $689,949, an increase of $27,947 from last year. -17- FIBER OPTICS ENTERPRISE FUND In 2007, the City started its Fiber Optics Project, which will run a fiber optics 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 completed as of the year ended December 31, 2010 and became fully operational. The following graph presents four years of operating results for the Fiber Optics Enterprise Fund: $(1,500,000) $(1,000,000) $(500,000) $– $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 2010201120122013 Fiber Optics Enterprise Fund Year Ended December 31, Operating Revenue Operating Expense Operating Income (Loss) Before Depreciation At December 31, 2013, the Fiber Optics Enterprise Fund had a cash balance of $202,976 and a deficit net position balance of ($12,030,506). Net position consisted of a deficit of ($9,315,668) in net investment in capital assets and a deficit of ($2,714,838) of unrestricted net position. Operating revenue in this fund declined $172,482, or 9.6 percent, in fiscal 2013. This is the result of a combination of having less customers and the City changing billing practices to match industry standards. The operating loss in this fund during this year was $1,682,768. After you add in $1,936,848 in interest on borrowing from other funds and bonds outstanding, the total overall loss in the fund was almost $3.6 million. This is a staggering figure considering the total overall annual expenses of the City are around $23.0 million. At December 31, 2013, this fund had $26.4 million outstanding in bonds. As a result of the continued operating loss, the City went into default on these bonds by not making the scheduled principal and interest payments on the bonds. As a result of poor operating results, we highly recommend the City continue to take action toward revising its strategic plan for the future of this fund. The continued development of this plan would include a discussion on how the current financial results compare to the original strategic plan for this fund. The continued development of this plan should consider all options available to the City as it relates to this enterprise fund. Most importantly, this plan should continue to include a discussion on the impact this fund is having on the overall financial health of the City, including what impact the changes made to the plan are expected to have on the City as a whole in the short-term but also over the long-term. -18- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net position is divided into three components: net investment capital assets, restricted, and unrestricted. The following table presents the components of City’s net position as of December 31, 2013 and 2012, for governmental activities and business-type activities. The data for fiscal 2012 in this document has been restated as a result of a change in fund structure, change in accounting principle, and prior period adjustment all reported in fiscal 2013. Increase 20132012, as Restated (Decrease) Net position Governmental activities Net investment in capital assets44,268,757$ 40,868,506$ 3,400,251$ Restricted18,118,070 18,231,653 (113,583) Unrestricted13,487,299 16,601,407 (3,114,108) Total governmental activities75,874,126 75,701,566 172,560 Business-type activities Net investment in capital assets20,496,832 22,687,306 (2,190,474) Unrestricted6,463,638 7,726,250 (1,262,612) Total business-type activities26,960,470 30,413,556 (3,453,086) Total net position 102,834,596$ 106,115,122$ (3,280,526)$ December 31, The City’s total net position at December 31, 2013 was $3,280,526 lower, excluding the change in accounting principle and the prior period adjustment, than at the beginning of the year. The overall financial results are reflective of the significant decline in net position in the Fiber Optics Project, which totaled $3.3 million before transfers. The increase in net investment in capital assets is reflective of the City’s continued investment in land and capital improvements in the City. It also reflects continued payments on outstanding bonds which are exceeding depreciation on related assets. -19- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in net position of the City for the years ended December 31, 2013 and 2012. The data for fiscal 2012 in this document has been restated as a result of a change in fund structure, change in accounting principle, and prior period adjustment all reported in fiscal 2013. 2012, as Restated Program ExpensesRevenuesNet ChangeNet Change Net (expense) revenue Governmental activities General government 1,623,727$ 147,244$ (1,476,483)$ (1,483,745)$ Public safety 1,884,981 349,903 (1,535,078) (1,496,433) Public works 5,163,461 1,731,315 (3,432,146) (2,711,369) Sanitation 487,268 16,653 (470,615) (446,960) Culture and recreation 2,875,260 1,307,149 (1,568,111) (1,563,135) Economic development 1,005,813 – (1,005,813) (803,594) Interest on long-term debt 235,265 – (235,265) (1,242,712) Business-typ e activities Water 1,009,600 1,214,570 204,970 186,134 Sewer 2,466,660 1,981,491 (485,169) (629,738) Liquor 689,559 1,318,276 628,717 552,743 Deputy registrar 293,531 456,285 162,754 (6,322) Fiber optic 5,240,871 1,606,720 (3,634,151) (3,480,841) 22,975,996$ 10,129,606$ (12,846,390) (13,125,972) General revenues Taxes 8,927,164 8,746,348 Franchise taxes 320,640 339,518 General aids and grants 65,228 38,618 Investment earnings (306,303) 1,032,311 Other general revenues 555,250 640,959 Gain on sale of assets 3,885 11,575 9,565,864 10,809,329 (3,280,526)$ (2,316,643)$ 2013 Total net (expense) revenue Total general revenues Change in net position 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 if the City’s business-type activities are generating sufficient program revenues (service charges and program-specific grants) to cover expenses. This is critical given the current downward pressures on the general revenue sources. -20- LEGISLATIVE UPDATES Despite an improving economy, the 2013 Legislature faced the familiar prospect of having to address a significant projected deficit in order to adopt a balanced budget for the next biennium. The November 2012 financial forecast projected a deficit of $1.1 billion in the state General Fund for the 2014–2015 biennium, which was revised down to a $627 million deficit in the February 2013 forecast. Even with this challenge, there was an expectation that with one political party holding the Governor’s office and majorities in both the House and Senate, this biennial budget agreement would be reached more quickly and easily than the previous one, which featured numerous vetoes, a special session, and the longest shutdown of non-essential state government services in Minnesota history. While in the end there was no special session or government shutdown, the 2013 session still stretched until the final day allowable under the state constitution, with the last bill passed at midnight. The following is a summary of recent legislative activity affecting the finances of Minnesota cities in 2013 and into the future: Local Government Aid (LGA) – The state-wide LGA appropriation for fiscal 2013 was set to increase about 2.8 percent to $426.4 million. However, the 2012 Legislature froze 2013 LGA payments at 2012 levels for cities with a population of 5,000 or more. For cities with populations below 5,000, 2013 LGA was the greater of their 2012 aid or the amount they would have received for 2013 under existing law. The 2013 Legislature completely overhauled the LGA formula for fiscal year 2014 and thereafter, creating a three-tiered formula that includes separate “need factor” calculations for cities with populations under 2,500, between 2,500 and 10,000, or over 10,000. The new formula simplifies the LGA calculation, and is designed to reduce the volatility of the LGA distribution by limiting the amount it may decline in a given year. Under the new formula, each city’s LGA distribution for 2014 will be no less than their 2013 LGA. Beginning in 2015, any reduction to a city’s LGA distribution will be limited to the lesser of $10 per capita, or 5 percent of their previous year net tax levy. For cities that gain under the new formula, the increases will be distributed proportionate to their unmet need, as determined by the new “need factor” calculations. The state-wide LGA appropriation is $507.6 million for fiscal 2014, $509.1 million for 2015, and $511.6 million for fiscal 2016 and thereafter. Levy Limits – A levy limit for city property tax levies payable in 2014 was established for all cities with populations exceeding 2,500. The levy limit base is the certified levy (excluding special levies) plus the certified LGA for taxes payable in fiscal 2012 or 2013, whichever is greater, increased by 3 percent. The levy limit is equal to the base, less the city’s certified LGA for fiscal 2014. Levies for special purposes such as debt service, abatements, or voter-approved purposes, are not subject to this limitation. Market Value Definitions – A number of levy, tax, spending, debt, and similar limits that had previously been computed based on “market value” or “taxable market value” must now be computed based on “estimated market value.” This change was enacted to eliminate the effects of the homestead market value exclusion established in 2011. Levy Authority for Watershed Management Plan – Cities are granted the authority to levy taxes to provide funding for the implementation of a comprehensive watershed management plan. Tax Status of Leased Tax-Exempt Property – Tax-exempt property owned by a political subdivision and held under a lease for a term of at least one year, or under a contract for the purchase thereof, is considered to be the property of the person holding it for all purposes of taxation. This change makes the tax treatment of leased property owned by local governments consistent with leased property owned by the federal government. -21- Tax Increment Financing (TIF) – A number of changes and clarifications were made to rules governing the use of TIF, including:  The prohibition on using tax increments for improvements or equipment primarily of a decorative or aesthetic nature, or with costs twice as high due to the selection of materials or designs compared to more commonly used improvements or equipment, is eliminated.  The four-year rule originally applying to TIF Districts certified between January 1, 2005 and April 20, 2009 is extended through December 31, 2016.  Development authorities may elect to reduce the original net tax capacity of qualifying TIF districts for the effects of the homestead market value exclusion that replaced the homestead tax credit program.  Taxes paid by captured tax capacity of TIF districts that are attributable to the new general education levy authorized by the 2013 Legislature, will be paid to the school district that imposes the levy. Park Dedication Fees – A clarification was made to define the basis on which a city calculates a park dedication fee charged to a developer in lieu of dedicating land for park usage. The fee must be calculated on the fair market value of the land as annually determined by the city based on tax valuation or other relevant data. The new law also provides a method for resolving valuation disputes through negotiation or the use of independent appraisals of land in the same land use category. Host Community Economic Development Grants – A new program was created that will provide grants for the acquisition and improvement of publicly owned capital assets for metro-area cities that host waste disposal facilities. No local matching funds are required. Change to Small Cities Development Block Grants – The Minnesota Department of Employment and Economic Development is now allowed to provide a forgivable loan through the Small Cities Development Block Grant Program directly to a private enterprise. The city in which the private enterprise is located is no longer required to submit an application, only a resolution of support. Wastewater and Stormwater Funding – Several changes were made to wastewater and stormwater grant and loan programs administered by the Public Facilities Authority. The changes include expanded eligibility for some programs, and increased grant or loan ceilings for others. Sales Tax Exemption – Cities are exempted from paying sales tax on qualifying purchases, effective for purchases made on or after January 1, 2014. This exemption does not include purchases of goods or services to be used as inputs to goods or services cities provide to the public that are generally provided by a private business, such as liquor stores, golf courses, marinas, or fitness centers. Cities with a population over 500 will be required to include a property tax savings report along with its proposed 2013 payable 2014 property tax levy certification, with the amount of sales or use taxes paid or estimated to have been paid in fiscal 2012. Cities must also discuss the savings resulting from the sales tax exemption at their fall truth-in-taxation public hearings. Organized Solid Waste Collection – The process for imposing the city-organized collection of solid waste was streamlined and better defined. The previous 180-day process for cities to adopt organized collection of solid waste was eliminated. The process now begins with a 60-day period in which cities may negotiate with collectors currently operating in the city, thereby giving them the first opportunity to develop a proposal for organized collection. If the 60-day negotiation period ends without an agreement, a city may continue the process by passing a resolution to form a committee to study the methods of organizing collection and make recommendations. A city must provide public notice and hold at least one public hearing before deciding to implement organized collection. -22- Pensions – An omnibus pension bill was passed that made a number of changes to both state-wide pension plans and single employer relief associations, including:  Changes to the Public Employees Retirement Association (PERA) General Plan: o The “average salary” for determining surviving spouse and dependent benefits was redefined. o A number of clarifications were made to what constitutes “salary” for plan purposes. o Changes were made to the level of annual post-retirement adjustments, which will vary based on the funding level of the plan.  Changes to the PERA Police and Fire Plan: o Increases employee contribution rate from 9.6 percent of salary to 10.2 percent for fiscal 2014, and 10.8 percent for fiscal 2015 and thereafter. o Increases employer contribution rate from 14.4 percent of salary to 15.3 percent for fiscal 2014, and 16.2 percent for fiscal 2015 and thereafter. o A 20-year proportional vesting period was established for new hires beginning in 2014, under which the member becomes 50 percent vested after 10 years, and vests an additional 5 percent annually until fully vested at 20 years. o The retirement annuity formula calculation was changed to incorporate the effect of the new 20-year vesting period, and a new cap of 33 years on allowable service time included in the annuity calculation. o The early retirement reduction factor was increased from the current 2.4 percent per year to 5 percent, phased in over a 5-year period beginning July 1, 2014. o Changes were made to the level of annual post-retirement adjustments, which will vary based on the funding level of the plan.  Changes to single employer relief associations: o The threshold of assets at which police relief associations and salaried or volunteer fire relief associations must prepare financial statements and have them audited by an independent auditor was raised from $200,000 to $500,000. o Volunteer firefighter relief associations are now required to pay a supplemental survivor benefit whenever it pays a survivor benefit, regardless of whether it is authorized in the association bylaws. o Any change to the interest rate paid during the deferral period of lump-sum service pensions must be approved by the governing body of the city or independent firefighting corporation to which the association is related. In addition, a new supplemental state aid was created to provide funding for pension plans. An annual allotment of $15.5 million will be distributed among the PERA Police and Fire Plan ($9 million), municipal volunteer firefighter associations ($5.5 million allocated based on proportionate share of fire state aid), and the Minnesota State Retirement System State Patrol Plan ($1 million). Expansion of Debt Authority – Several changes were made to expand the allowable uses of certain types of debt, including:  Home rule charter city or statutory city capital notes are allowed to be used for the purchase of application development services and training related to the use of computer hardware and software.  Capital improvement program (CIP) bonds are allowed to be used for expenditures incurred before the adoption of the CIP, if the expenditures are included in the plan.  Street reconstruction bonds are allowed to be used for bituminous overlay projects, which previously had not been included in the definition of reconstruction. -23- Authorized Investments – The list of authorized investments for cities was expanded to include: revenue obligations issued by local governments without levy authority that are rated AA or better; short-term (13 month maturity or less) obligation issued by a school district that is either rated in the highest credit rating category or covered by the State of Minnesota Credit Enhancement Program; and short-term (18 month maturity or less) guaranteed investment contracts when the issuer’s or guarantor’s short-term debt is rated in the highest rating category, even if their long-term debt is rated below the top two rating categories. Elections – The Legislature passed an omnibus elections policy bill that made a number of changes and clarifications to election requirements, including:  Establishing “no excuse” absentee balloting;  Increasing the time for counting absentee ballots from 4 days prior to the election to 7;  Reducing the number of people a voter may vouch for in a polling place from 15 to 8;  Eliminating the requirement to have at least one telecommunications device for deaf voter registration in every city of the first, second, or third class;  Requiring that the municipal clerk designated to administer absentee ballots also be responsible for the administration of a “ballot board”;  Reducing the number of election judges required in a precinct for elections other than a general election from 4 to 3, for precincts with more than 500 voters; and allowing the minimum number of three election judges for all elections including general elections for precincts with less than 500 registered voters;  Modifying the vote differentials requiring publically funded recounts to 0.25 percent in elections where more than 50,000 votes are cast, and 0.5 percent for elections in which between 400 and 50,000 votes are cast;  Amending the time period in which cities are prohibited from holding a special election from the first 40 days following a general election to the first 56 days;  Increasing the number of days’ notice a city clerk must provide to a county auditor before holding a municipal election from 67 to 74 days; and  Establishing a pilot program and task force for the use of electronic rosters of voters. Alternative Bid Publication for Projects Funded by Special Assessments – A technical change was made to eliminate duplicative publication requirements for projects funded with special assessments. The definition of “recognized industry trade journal” was broadened to include websites or electronic publications, thereby eliminating circumstances that were forcing cities utilizing an alternative electronic publication method to also publish written notice for certain projects. Met Council Allocated Costs – A change was made to allow cities that are allocated costs by the Met Council to request the cost be deferred, or to be paid over time on a payment schedule with interest as agreed to by the Met Council. Liquor Licensing – An omnibus liquor bill was passed that made several changes to liquor licensing and distribution. Among the changes are: authorizing cities with municipal liquor operations to issue brewer taproom licenses that allow consumption on the premises or adjacent to malt liquor breweries; authorizing cities to issue brewers a license for off-sale of malt liquor packaged by the brewer; providing for the sale of malt-liquor educator licenses that will allow malt liquor tastings and education to be conducted similar to wine tastings; and allowing micro-distilleries to provide product samples on site. Tax-Exempt Holding Period for Development Property – The tax exempt holding period for city-owned land held for development is increased from 9 to 15 years for property acquired between January 1, 2000 and December 31, 2010, or for property located in a city outside of the metro area with a population under 20,000. -24- Citizen Contact Information Classified as Private Data – Citizen contact information submitted to cities in order to receive certain notifications or to subscribe to the city’s electronic publications, such as phone numbers or email addresses, is now classified as private data. The names of people on such lists remain public information. Criminal History and Background Checks – Cities are authorized to perform criminal history checks on applicants for: city employment, volunteer positions, or a license that does not otherwise subject the applicant to a criminal history check. Such criminal history checks may not be substituted for statutorily mandated background checks. Background checks are now required for all fire department applicants, and are allowed for current fire department employees. The fire chief is also required to perform criminal history record checks of applicants. -25- ACCOUNTING AND AUDITING UPDATES GASB STATEMENT NO. 67 – FINANCIAL REPORTING FOR PENSION PLANS – AN AMENDMENT OF GASB STATEMENT NOS. 25 AND 50 The primary objective of this statement is to improve financial reporting by state and local government pension plans. GASB Statement No. 67 replaces the requirements of GASB Statement Nos. 25 and 50 for pension plans that are administered through trusts or equivalent arrangements that meet the following criteria: contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable; pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms; and pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members. The requirements of GASB Statement Nos. 25 and 50 remain applicable to pension plans that are not administered through trusts covered by the scope of this statement and to defined contribution plans that provide post-employment benefits other than pensions. The statement makes a number of changes in the financial statement presentation, measurement, and required disclosures relating to the reporting of these types of pension plans. This statement is effective for financial statements for fiscal years beginning after June 15, 2013. Earlier application is encouraged. GASB STATEMENT NO. 68 – ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS – AN AMENDMENT OF GASB STATEMENT NOS. 27 AND 50 The primary objective of this statement is to improve accounting and financial reporting by state and local governments for pensions. This statement replaces the requirements of GASB Statement Nos. 27 and 50, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements that meet certain criteria (as described earlier for GASB Statement No. 67). The requirements of GASB Statement Nos. 27 and 50 remain applicable for pensions that are not covered by the scope of this statement. This statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. In addition, this statement details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. This statement also addresses circumstances in which a nonemployer entity has a legal requirement to make contributions directly to a pension plan. This statement is effective for financial statements for fiscal years beginning after June 15, 2014. Earlier application is encouraged. Included in this statement are major changes in how employers that participate in cost-sharing pension plans, such as the Teachers’ Retirement Association (TRA) and PERA, account for pension benefit expenses and liabilities. In financial statements prepared using the economic resources measurement focus and accrual basis of accounting (government-wide and proprietary funds), a cost-sharing employer that does not have a special funding situation is required to recognize a liability for its proportionate share of the net pension liability of all employers with benefits provided through the pension plan. A cost-sharing employer is required to recognize pension expense and report deferred outflows of resources and deferred inflows of resources related to pensions for its proportionate share of collective pension expense and collective deferred outflows of resources and deferred inflows of resources related to pensions. In addition, the effects of (1) a change in the employer’s proportion of the collective net pension liability and (2) differences during the measurement period between the employer’s contributions and its proportionate share of the total of contributions from employers included in the collective net pension liability are required to be determined. These effects are required to be recognized in the employer’s pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all active and inactive employees that are provided with pensions through the pension plan. -26- GASB STATEMENT NO. 69 – GOVERNMENT COMBINATIONS AND DISPOSALS OF GOVERNMENT OPERATIONS This statement provides accounting and financial reporting guidance, including disclosure requirements, for government combinations and disposals of government operations. Government combinations include mergers, acquisitions, and transfers of operations. Included within the scope of this statement are combinations of governmental entities, or combinations of governmental entities with nongovernmental entities (such as a nonprofit entity), as long as the new or continuing organization is a government. This statement does not apply to combinations in which a government acquires an organization that continues to exist as a separate entity, or acquires an equity interest in an organization that remains legally separate from the acquiring government. A disposal of operations occurs when a government either transfers or sells specific operations. The provisions of this statement are effective for financial statements for periods beginning after December 15, 2013. Earlier application is encouraged. CHANGES TO REQUIREMENTS FOR FEDERAL GRANTS In December 2013, the U.S. Office of Management and Budget (OMB) issued “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Audits,” which supersedes all or parts of eight OMB circulars; consolidating federal cost principles, administrative principles, and audit requirements in one document. The “Super Circular” includes a number of significant changes to the federal Single Audit process, including an increase in dollar threshold for requiring a Single Audit, changes to the thresholds and process used for determining major programs, a reduction in the percentage of expenditures required to be covered by a Single Audit, revised criteria for determining low-risk auditees, and an increase in the threshold for reporting questioned costs. The draft version of this guidance also included proposed reductions in the number of compliance requirements to be tested in a Single Audit, but final guidance on those changes will not be available until an updated compliance supplement is issued in 2014.