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2017 Monticello Auditor's Management Letter Management Report for City of Monticello, Minnesota December 31, 2017 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, 2017. We have organized this report into the following sections: •Audit Summary •Governmental Funds Overview •Enterprise Funds Overview •Government-Wide Financial Statements •Legislative Updates •Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. The purpose of this report is solely to provide those charged with governance of the City, management, and those who have responsibility for oversight of the financial reporting process comments resulting from our audit process and information relevant to city finances in Minnesota. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota June 14, 2018 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, 2017, and the related notes to the financial statements. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you verbally and in our audit engagement letter. Professional standards also require that we communicate the following information related to our audit. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously discussed and coordinated in order to obtain sufficient audit evidence and complete an effective audit. AUDIT OPINION AND FINDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2017: • We 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, 2017, 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, we reported that the City did not have proper internal controls over compliance with procurement requirements, which led to one instance of noncompliance. There was no similar finding in the current year. • In the prior year, we also reported that the City did not have documented written controls to ensure compliance with the U.S. Office of Management and Budget’s Uniform Guidance cash management, allowable costs, procurement, and conflict of interest standards . There was no similar finding in the current year as the City adopted written policies in the current year. -2- 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, 2017; however, the City implemented the following governmental accounting standards during the fiscal year: • Governmental Accounting Standards Board (GASB) Statement No. 79, Certain External Investment Pools and Pool Participants, which enhanced disclosures regarding investments. • GASB Statement No. 82, Pension Issues, an amendment of GASB Statements No. 67, No. 68, and No. 73, which addressed certain issues related to pension reporting and disclosures. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may 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 – These obligations are calculated using actuarial methodologies described in GASB Statement Nos. 45 and 68. These actuarial calculations include significant assumptions, including projected changes, healthcare insurance costs, investment returns, retirement ages, proportionate share, and employee turnover. • 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 (PTO), 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. 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. -3- 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 a ddition, 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. DISAGREEMENTS WITH MANAGEMENT For purposes of this report, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated June 14, 2018. MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards r equire 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 response s were not a condition to our retention. OTHER MATTERS We applied certain limited procedures to the management’s discussion and analysis, 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. -4- 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 2016 fiscal year, local ad valorem property tax levies provided 39.8 percent of the total governmental fund revenues for cities over 2,500 in population, and 36.4 percent for cities under 2,500 in population. The total market value of property in Minnesota cities increased about 5.6 percent for the 2017 levy year, which followed an increase of 5.7 percent for levy year 2016. T he market values used for levying property taxes are based on the previous fiscal year (e.g., market values for taxes levied in 2017 were based on assessed values as of January 1, 2016), so the trend of change in these market values lags somewhat behind the housing market and economy in general. The City’s taxable market value increased 13.1 percent for taxes payable in 2016 and 6.8 percent for taxes payable in 2017. 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Market Value -5- 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. Conseq uently, a city’s total tax capacity will change at a different rate than its total market value, as tax capacity is affected by the proportion of its tax base that is in each property classification from year -to-year, as well as legislative changes to tax rates. The City’s tax capacity increased 7.8 percent and 6.5 percent for taxes payable in 2016 and 2017, respectively. 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 $30,000,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Net Tax Capacity The following table presents the average tax rates applied to city residents for each of the last three levy years, along with comparative state-wide and average rates from the two most recent years for which the information is available: 2015 2016 2015 2016 2017 Average tax rate City 46.9 46.5 35.7 34.5 33.2 County 44.7 44.1 40.6 40.0 39.6 School 27.1 27.5 22.9 20.9 16.2 Special taxing 6.9 6.9 – 1.1 1.0 Total 125.6 125.0 99.2 96.5 90.0 Note: State-wide and metro area average tax rates are not available for 2017. All Cities State-Wide City of Monticello Rates Expressed as a Percentage of Net Tax Capacity The City’s portion of the tax rate has been lower than state-wide averages for the last few years as a result of improved market values and tax capacities. -6- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2017, presented both by fund balance classification and by major fund: Increase 2016 2017 (Decrease) Fund balances of governmental funds Total by classification Nonspendable 162,029$ 134,357$ (27,672)$ Restricted 6,987,234 7,924,461 937,227 Assigned 16,983,264 16,910,080 (73,184) Unassigned 6,142,475 6,918,224 775,749 Total governmental funds 30,275,002$ 31,887,122$ 1,612,120$ Total by fund Major funds General 6,276,720$ 7,029,093$ 752,373$ Community Center 761,829 580,513 (181,316) Economic Development Authority 7,142,330 7,468,105 325,775 Debt Service 3,543,551 2,800,980 (742,571) Capital Projects 6,884,229 8,473,508 1,589,279 Nonmajor funds 5,666,343 5,534,923 (131,420) Total governmental funds 30,275,002$ 31,887,122$ 1,612,120$ 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 $1,612,120 during the year ended December 31, 2017. The majority of the increase was due to the increase in the Capital Projects Fund from unspent bond proceeds. -7- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year -to-year due to the effect of inflation and changes in its operation. Also, certain data in these tables may be classified differently than how they appear in the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of the City. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the MD&A. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. 2015 2016 2017 2,500–10,000 10,000–20,000 20,000–100,000 13,125 13,299 13,409 460$ 432$ 455$ 658$ 699$ 715$ 26 26 42 55 50 48 35 43 45 25 31 33 59 44 59 253 74 71 35 33 42 35 50 45 313 275 152 116 153 100 110 92 103 157 167 142 91 57 54 59 73 55 1,129$ 1,002$ 952$ 1,358$ 1,297$ 1,209$ Total revenue Year Population Property taxes Tax increments Franchise fees and other taxes Special assessments Licenses and permits Intergovernmental revenues Charges for services Other December 31, 2016 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’s per capita governmental funds revenue for 2017 was $1,209, a decrease of about 6.8 percent, from the prior year. Intergovernmental revenue decreased $53 per capita, due to federal, state, and county funding for the Highway 25/75 Intersection Project that was completed in 2016. Charges for services and other revenues decreased $25 and $18 per capita, respectively, based on decreased storm sewer trunk charges and the sale of parcels of land held for resale in 2016. -8- The expenditures of governmental funds will also vary from state -wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the importan t factor. Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with comparative state-wide averages, are presented in the following table: 2015 2016 2017 2,500–10,000 10,000–20,000 20,000–100,000 13,125 13,299 13,409 Current 145$ 114$ 97$ 112$ 112$ 121$ 263 250 273 150 153 162 126 123 95 132 146 150 93 109 95 200 207 219 74 77 91 140 88 82 701 673 651 734 706 734 381 370 301 171 469 405 196 163 115 383 427 292 48 38 34 49 48 42 244 201 149 432 475 334 1,326$ 1,244$ 1,101$ 1,337$ 1,650$ 1,473$ Total expenditures Capital outlay and construction Population Year Debt service Interest and fiscal charges Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Monticello Principal December 31, 2016 State-Wide General government Public safety Street maintenance and lighting Recreation and culture 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 decreased significantly from the prior year and 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. -9- 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 recreation and culture. 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. 2013 2014 2015 2016 2017 Fund Balance $3,914,563 $4,331,058 $4,986,796 $6,276,720 7,029,093 Cash Balance $4,020,940 $4,639,206 $5,649,254 $7,091,381 8,130,998 Expenditures $6,420,890 $6,409,507 $6,715,369 $6,992,812 $7,442,697 $– $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 City’s General Fund cash and investments balance at December 31, 2017 was $8,130,998, which increased $1,039,617 from 2016. Total fund balance at December 31, 2017 was $7,029,093, up $752,373. This fund balance level represents approximately 94.4 percent of the City’s annual General Fund expenditures, based on 2017 expenditure levels. The City’s adopted fund balance policy requires that the City set aside fund balance to represent 65.0 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. -10- The following graph reflects the City’s General Fund revenue sources for 2017 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 2017 were $8,493,345, which was $691,345 (8.9 percent) over the final budget. As reflected in the table above, other revenues were over budget by $195,511, which was mainly due to receiving dividends from the League of Minnesota Cities Insurance Trust that were not expected in the budget. Licenses and permits revenue also exceeded budgeted amounts by $221,533, as a result of new development and construction in the City. 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 2013 $5,605,102 $372,631 $971,213 2014 $5,527,958 $320,691 $1,270,353 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 $– $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 General Fund Revenue by Source Year Ended December 31, The graph reflects the City’s increasing reliance on taxes to finance its General Fund operations. Overall, General Fund revenues increased $221,789 (2.7 percent) from the previous year. Property taxes increased $180,015, due to an increase in the General Fund tax levy. -11- The following graphs illustrate the components of General Fund spending for 2017 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 2017 were $7,442,697, which was $359,303 (4.6 percent) under budget. The public works area was under budget by $363,164, mainly due to position vacancies, low fuel costs, and a mild winter. 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 2013 $1,555,532 $1,805,434 $1,700,146 $853,782 $505,996 2014 $1,450,930 $1,845,073 $1,792,870 $802,678 $517,956 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 $– $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 General Fund Expenditures by Function Year Ended December 31, Overall, General Fund expenditures increased $449,885 (6.4 percent) from the prior year. Nearly all general fund expenditure functions increased in 2017, with the largest change in public safety ($141,951), mainly due to inflationary increases to the law enforcement contract with Wright County and increased activity in fire and rescue as well as building inspection. -12- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which includes the Water Utility, Sewage Utility, Liquor Operations, Fiber Optics, and Deputy Registrar Funds. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2017, presented both by classification and by fund: Increase 2016 2017 (Decrease) Net position of enterprise funds Total by classification Net investment in capital assets 41,014,122$ 39,944,797$ (1,069,325)$ Unrestricted 8,998,670 11,832,010 2,833,340 Total enterprise funds 50,012,792$ 51,776,807$ 1,764,015$ Total by fund Water 14,390,486$ 14,823,165$ 432,679$ Sewage 20,489,128 21,436,849 947,721 Liquor 1,141,827 1,626,362 484,535 Fiber Optics 13,361,470 13,050,807 (310,663) Deputy Registrar 629,881 839,624 209,743 Total enterprise funds 50,012,792$ 51,776,807$ 1,764,015$ Enterprise Funds Change in Financial Position Net Position as of December 31, In total, the net position of the City’s enterprise funds increased by $1,764,015 during the year ended December 31, 2017. The decline in the net investment in capital assets relates to depreciation expense being higher than the payments on the related debt. The increase in unrestricted net position is a result of positive operating results in these funds. -13- WATER ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Water Enterprise Fund: 2013 2014 2015 2016 2017 Oper Rev $1,239,083 $1,117,226 $1,126,718 $1,172,258 $1,415,441 Oper Exp $1,009,872 $1,086,006 $1,105,230 $1,172,236 $1,160,339 Oper Inc Before Dep $749,225 $545,930 $535,302 $502,469 $778,909 $– $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, At December 31, 2017, the Water Enterprise Fund had a cash balance of $4,858,535 and a net position of $14,823,165. Net position consisted of $9,784,393 in net investment in capital assets and $5,038,772 in unrestricted net position. Operating revenue in the Water Enterprise Fund is $1,415,441, an increase of $243,183 from the prior year, mostly due to an increase in rates and usage, while operating expenses for 2017 were $1,160,339, a decrease of $11,897. 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 rate s so that they are designed to also provide for future repairs and replacement of the infrastructure assets. -14- SEWAGE ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Sewage Enterprise Fund: 2013 2014 2015 2016 2017 Oper Rev $2,006,718 $2,081,660 $2,083,122 $2,223,252 $2,472,774 Oper Exp $2,383,924 $2,676,729 $2,582,554 $2,554,310 $2,644,096 Oper Inc Before Dep $730,302 $511,463 $603,965 $811,421 $920,157 $– $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 Sewage Enterprise Fund Year Ended December 31, At December 31, 2017, the Sewage Enterprise Fund had a cash balance of $3,956,893 and a net position balance of $21,436,849. Net position consisted of $17,312,490 in net investment in capital assets and $4,124,359 of unrestricted net position. Sewage Enterprise Fund operating revenues for 2017 were $2,472,774, which is $249,522 more than the previous year, due to increased rates and usage. Operating expenses for 2017 were $2,644,096, which increased $89,786 from 2016. 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. -15- LIQUOR ENTERPRISE FUND The following graph presents five years of comparative 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 $5,600,000 $6,000,000 2013 2014 2015 2016 2017 Liquor Enterprise Fund Year Ended December 31, The Liquor Enterprise Fund ended 2017 with a net position balance of $1,626,362, an increase of $484,535 from the prior year. Of the net position balance, $143,888 represents the investment in liquor capital assets, leaving $1,482,474 of unrestricted net position. Liquor sales for 2017 were $5,751,197, an increase of $302,613 from last year. The Liquor Enterprise Fund generated a gross profit of $1,521,181 in 2017, or about 26.4 percent, of gross sales, a significant increase from 25.8 percent in 2016. Operating expenses for 2017 were $880,415, an increase of $44,367 from last year, due mainly to its ability to operate on Sundays for the second half of the year. -16- FIBER OPTICS ENTERPRISE FUND The following graph presents five years of comparative operating results for the Fiber Optics Enterprise Fund: 2013 2014 2015 2016 2017 Oper Rev $1,621,662 $1,761,978 $1,642,403 $1,739,566 $1,757,134 Oper Exp $3,304,431 $2,811,084 $2,429,792 $2,490,920 $2,252,287 Oper Inc (Loss) Before Dep $(1,271,951)$(606,176)$(367,607)$(331,799)$(82,234) $(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 Fiber Optics Enterprise Fund Year Ended December 31, At December 31, 2017, the Fiber Optics Enterprise Fund had a cash balance of $400,475 and a net position balance of $13,050,807. Net position consisted of $12,642,637 in net investment in capital assets and $408,170 of unrestricted net position. Operating revenue in this fund was $1,757,134, an increase of $17,568, or 1.0 percent, in 2017. Operating expenses decreased $238,633 in fiscal 2017. This was mainly due to turning over the employees of the City’s FiberNet Monticello to a third party management company, which caused a decrease in overall costs. In 2017, the operating loss in this fund before depreciation was $82,234. This was an improvement of $249,565 in the current year, mostly related to decreased operating expenses. 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. -17- DEPUTY REGISTRAR ENTERPRISE FUND The following graph presents five years of comparative operating results for the City’s Deputy Registrar Enterprise Fund: 2013 2014 2015 2016 2017 Oper Rev $456,384 $497,798 $535,931 $562,891 $594,777 Oper Exp $294,138 $302,709 $318,686 $352,117 $398,054 Oper Inc (Loss) Before Dep $167,088 $198,274 $220,430 $213,959 $201,132 $– $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 Deputy Registrar Fund Year Ended December 31, At December 31, 2017, the Deputy Registrar Enterprise Fund had a cash balance of $1,106,123 and a net position balance of $839,624. Net position consisted of $61,389 in net investment in capital assets and $778,235 of unrestricted net position. Deputy Registrar Enterprise Fund operating revenues for 2017 were $594,777, which is $31,886 more than the previous year, mostly due to an increase in charges for services. Operating expenses for 2017 were $398,054, which is $45,937 higher than 2016, due to increased personal services from the Minnesota Licensing and Registration System (MNLARS) transition. THIS PAGE INTENTIONALLY LEFT BLANK -18- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government -wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net position is divided into three components: net investment in capital assets, restricted, and unrestricted. The following table presents the components of the City’s net position as of December 31, 2017 and 2016, for governmental activities and business-type activities: Increase 2016 2017 (Decrease) Net position Governmental activities Net investment in capital assets 41,077,683$ 41,535,637$ 457,954$ Restricted 10,569,693 11,599,951 1,030,258 Unrestricted 20,824,170 20,899,110 74,940 Total governmental activities 72,471,546 74,034,698 1,563,152 Business-type activities Net investment in capital assets 41,014,122 39,944,797 (1,069,325) Unrestricted 9,052,590 11,905,058 2,852,468 Total business-type activities 50,066,712 51,849,855 1,783,143 Total net position 122,538,258$ 125,884,553$ 3,346,295$ December 31, The City’s total net position at December 31, 2017 was $3,346,295 higher than the prior year. Of the increase, $1,563,152 came from governmental activities and $1,783,143 from business-type activities. The increase in restricted net position in the governmental activities is mostly for future capital improvements. The changes in business-type activities net position were discussed earlier in this report. At the end of the current fiscal year, the City is able to present positive balances in all three categories of net position, both for the government as a whole, as well as for its separate governmental and business-type activities. The same situation held true for the prior year. -19- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net positions. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in the net position of the City for the years ended December 31, 2017 and 2016: 2016 Program Expenses Revenues Net Change Net Change Net (expense) revenue Governmental activities General government 1,656,666$ 430,882$ (1,225,784)$ (1,419,802)$ Public safety 2,208,971 1,058,471 (1,150,500) (1,098,466) Public works 5,292,743 2,256,912 (3,035,831) (2,067,366) Sanitation 614,328 134,655 (479,673) (510,344) Transit 3,191 – (3,191) (41,250) Parks and recreation 3,521,756 1,493,651 (2,028,105) (2,052,388) Economic Development 488,380 13,846 (474,534) (455,388) Interest on long-term debt 514,558 – (514,558) (468,271) Business-type activities Water 1,157,506 1,531,539 374,033 191,639 Sewage 2,708,053 3,056,577 348,524 1,416,967 Liquor 874,921 1,525,150 650,229 577,597 Fiber Optics 2,252,287 1,757,134 (495,153) (743,696) Deputy Registrar 390,658 594,777 204,119 217,399 21,684,018$ 13,853,594$ (7,830,424) (6,453,369) General revenues Property taxes and tax increments 10,208,513 9,938,944 Investment earnings 530,233 503,694 Other revenues 437,973 785,515 11,176,719 11,228,153 3,346,295$ 4,774,784$ 2017 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 The 2017 legislative session began with a full agenda, which included adopting a fiscal year 2018–2019 biennial state budget. The February 2017, state budget forecast projected that the state General Fund would end the 2016–2017 biennium with a surplus of $743 million, eliminating the need for budget cuts or transfers to balance the fund. However, the Legislature was expected to address several significant spending areas for which successful funding appropriations had not been passed in recent legislative sessions. The 2017 regular legislative session ended with four omnibus budget bills being vetoed, potentially leaving a number of these same areas without appropriations. After a three-day special session, the Governor and Legislature were able to agree on budget and appropriation bills addressing most of the state budgetary needs for the upcoming biennium, albeit not without several line item vetoes invoked by the Governor, including striking the appropriations for operating the House and Senate from the bills. The following is a summary of recent legislation affecting Minnesota cities: Omnibus Bonding Bill – The omnibus bonding bill authorizes financing for approximately $1.1 billion in capital improvements. Included in the approved funding was $255 million for transportation infrastructure, $83 million for economic development, $116 million for Public Financing Agency water infrastructure loans and grants to municipalities, and $4 million for Metropolitan Council inflow and infiltration improvement grants to metro area cities. Omnibus Transportation Bill – The omnibus transportation bill appropriates $2.95 billion in fiscal 2018 and $2.87 billion in fiscal 2019, for a wide variety of transportation related projects. Included in the appropriations are approximately $191 million and $198 million for municipal state aid street fund purposes in fiscal 2018 and fiscal 2019, respectively. Property Tax Relief – The omnibus tax bill contained a number of property tax relief measures, including: • Elimination of the implicit price deflator annual increase for the state general property tax levy, effectively freezing it at the payable 2018 level for many property classes; • Exempting the first $100,000 of each commercial-industrial parcel’s tax capacity from the state general property tax levy; • Expanding eligibility for homestead or agricultural property classification exemptions for certain types of resort and conservation property for general property taxes; and • Increasing the minimum value for a storage shed, deck, or similar structure on a leased mobile home to be considered taxable from $1,000 to $10,000. Local Government Aid – The annual appropriation for Local Government Aid (LGA) for cities was increased $15.0 million to $534.4 million for aid payable in 2018 and thereafter, and the LGA payment schedule was accelerated for fiscal 2019 only. Several corrections were also mad e to the city LGA formula calculation, and a sparsity adjustment was incorporated for certain medium and small cities beginning in 2018. Minnesota Investment Fund – The omnibus jobs and economic growth bill appropriates $12.5 million for each year of the biennium for the Minnesota Investment Fund, which is available for municipalities to provide loans to assist with the expansion of local businesses. Electronic Funds Transfers – Effective August 1, 2017, home rule charter cities of the second, third, or fourth class are added to the list of local government entities allowed to pay certain claims using electronic funds transfers. To be eligible, local governments must enact specified policy controls governing the initiation, authorization, and documentation of electronic funds transfers. Claims Declaration – The requirement to obtain a specific form of written claim declaration was also repealed based on the understanding that by making the claim, the party making the claim is declaring that the claim is just and correct and has not been paid previously. -21- City E-mail Address Required to Receive State Aid – Effective for state aids payable in 2018 and thereafter, cities will be required to register an official e-mail address with the Commissioner of the state Department of Revenue in order to receive state aid payments. Workforce Housing Tax Increment Financing – The omnibus tax bill created a new authorized use of tax increment financing (TIF), for workforce housing in cities located outside of the statutorily defined metropolitan area that meet certain criteria. Tax Increment Financing Interfund Loans – Interfund loan provisions for TIF were amended to make it easier for cities and development authorities to make and document interfund loans. Loans may now be made or documented up to 60 days after the actual transfer or expenditure occurs. Interfund loan resolutions may now be passed prior to the final approval of the related TIF plan. Loan terms may be amended after the loan has been made if the TIF district has not been decertified. Public Debt – The Legislature passed several amendments to statutes governing public debt that took effect on July 1, 2017, including: • Allowing both home rule charter and statutory cities to issue 20-year capital notes for projects to eliminate R-22 Freon-based refrigerant; • Increasing the maximum dollar limit on Housing and Redevelopment Authority general obligation bond issues from $3 million to $5 million; and • Modifying the requirements for street reconstruction bonds to be approved by a two -thirds majority of the governing body rather than requiring unanimous approval. Local Housing Trust Funds – The omnibus jobs and economic growth appropriations bill established authority for cities to create a local housing trust fund by ordinance, or to participate in a joint powers agreement to establish a regional housing trust fund. The funds, which may be financed from sources such as local government appropriations or housing and redevelopment authority levies, may be used for grants or loans for development, rehabilitation, financing of housing to match federal or state or private funds for housing, down payment assistance, rental assistance, or homebuyer counseling. Long-Term Equity Investment Authority – Effective July 1, 2017, cities with a population of more than 100,000 or those that had their most recently issued general obligation bonds rated in the highest category, are authorized to invest in an expanded list of authorized investments that includes certain equity-based investments. The amount invested in equity-based investments cannot exceed 15 percent of the sum of a city’s assigned cash, cash equivalents, deposits, and investments. Before investing in the expanded list of authorized investments, the governing body of the municipality must adopt a resolution acknowledging the risks assumed. Border-to-Border Broadband Grants – The Legislature appropriated $20 million in fiscal 2018 for the Border-to-Border Broadband Grant Program. The grants, available through the Office of Broadband Development in the Department of Employment and Economic Development, provide funding to help communities meet state goals for the development of state-wide, high-speed broadband access, focusing on areas currently considered to be underserved or with a high concentration of low-income households. Elections – An omnibus elections law was passed making several modifications to election administration, including: requiring special elections conducted by local governments be held on one of five uniform election dates, clarifying the timeline for municipalities to change from odd to even -year election cycles or vise-versa, allowing municipalities to canvass the results of a primary election on the second or third day after the primary, and appropriating $7 million for grants to replace aging election equipment or purchase electronic poll books. -22- Workers’ Compensation and PERA Retirement Benefits – A statutory change was adopted based on the results of recent court rulings that Public Employees Retirement Association (PERA) retirement benefits should not be offset against workers’ compensation permanent total disability benefits. Under the new law, claimants would receive all past and future permanent and total disability benefits without a PERA retirement offset. Notice of Proposed Ordinances – A new statute was created requiring cities to provide a 10-day notice prior to a scheduled final vote on most new proposed ordinances or amendments to ordinances, and specifying the various acceptable means of providing the required notification. State Building Code Applicability – Construction, additions, and alterations to places of public accommodation; defined as publicly or privately-owned facilities designed for occupancy by 200 or more people as a sports or entertainment arena, stadium, theater, community or convention hall, special event center, indoor amusement facility or water park, or indoor swimming pool; must comply with the state building code. Sunday Liquor Sales – Minnesota Statutes were amended to allow for the sale of intoxicating liquor on Sundays between the hours of 11:00 a.m. and 6:00 p.m. by off-sale licensees, effective July 1, 2017. REAL ID Act – Minnesota Statutes were amended to make the state compliant with federal REAL ID Act requirements, which will change identity verification and security related to state-issued identification cards and driver’s licenses. THIS PAGE INTENTIONALLY LEFT BLANK -23- ACCOUNTING AND AUDITING UPDATES GASB STATEMENT NO. 75, ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, establishes new accounting and financial reporting requirements for governments whose employees are provided with other post-employment benefits (OPEB), as well as for certain nonemployer governments that have a legal obligation to provide financial support for OPEB provided to the employees of other entities. This statement replaces the requirements of GASB Statement Nos. 45 and 57. This statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. Similar to changes implemented for pensions, this statement requires the liability of employer and nonemployer contributing entities to employees for defined benefit OPEB (net OPEB liability) to be measured as the portion of the present value of projected benefit payments to be provided to current active and inactive employees that is attributed to those employees’ past periods of service (total OPEB liability), less the amount of the OPEB plan’s fiduciary net position. Note disclosure and RSI requirements about defined benefit OPEB also are addressed. The requirements for this statement are effective for fiscal years beginning after June 15, 2017. Earlier application is encouraged. GASB STATEMENT NO. 83, CERTAIN ASSET RETIREMENT OBLIGATIONS This statement addresses accounting and financial reporting for certain asset retirement obligations (ARO), which are legally enforceable liabilities associated with the retirement of a tangible capital asset. This statement establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for ARO. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability when it is both incurred and reasonably estimable. The measurement of an ARO is required to be based on the best estimate of the current value of outlays expected to be incurred, and a deferred outflow of resources associated with an ARO is required to be measured at the amount of the corresponding liability upon initial measurement. This statement requires the current value of a government’s AROs to be adjusted for the effects of general inflation or deflation at least annually, and a government to evaluate all relevant factors at least annually to determine whether the effects of one or more of the factors are expected to significantly change the estimated asset retirement outlays. A government should remeasure an ARO only when the result of the evaluation indicates there is a significant change in the estimated outlays. Deferred outflows of resources should be reduced and recognized as outflows of resources in a systematic and rational manner over the estimated useful life of the tangible capital asset. If a government owns a minority interest in a jointly owned tangible asset where a nongovernmental entity is the majority owner or has operational responsibility for the jointly owned asset, the government’s minority share of an ARO should be reported using the measurement produced by the nongovernmental majority owner or the nongovernmental minority owner that has operational responsibility, without adjustment to conform to the liability measurement and recognition requirements of this statement. -24- The statement also requires disclosures of any funding or financial assurance requirements a government has related to the performance of asset retirement activities, along with any assets restricted for the payment of the government’s AROs. This statement also requires disclosure of information about the nature of a government’s AROs, the methods and assumptions used for the estimates of the liabilities, and the estimated remaining useful life of the associated tangible capital assets. If an ARO (or portions thereof) has been incurred by a government but is not yet recognized because it is not reasonably estimable, the government is required to disclose that fact and the reasons therefor. This statement requires similar disclosures for a government’s minority shares of AROs. The requirements of this statement are effective for reporting periods beginning after June 15, 2018. Earlier application is encouraged. GASB STATEMENT NO. 84, FIDUCIARY ACTIVITIES This statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the ass ets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and post-employment benefit arrangements that are fiduciary activities. An activity meeting the criteria should be reported in a fiduciary fund in the basic financial statements, which should present a statement of fiduciary net position and a statement of changes in fiduciary net position. This statement describes four fiduciary funds that should be reported, if applicable: (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) private -purpose trust funds, and (4) custodial funds. Custodial funds generally should report fiduciary activities that are not held in a trust or equivalent arrangement that meets specific criteria. A fiduciary component unit, when reported in the fiduciary fund financial statements of a primary government, should combine its information with its component units that are fiduciary component units and aggregate that combined information with the primary government’s fiduciary funds. This statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources, defined as when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets. The requirements of this statement are effective for reporting periods beginning after December 15, 2018. Earlier application is encouraged. GASB STATEMENT NO. 85, OMNIBUS 2017 The objective of this statement is to address issues that have been identified during implementation and application of certain GASB statements. The statement addresses a variety of topics, including issues related to blending component units, goodwill, fair value measurement and application, and post-employment benefits (pensions and OPEB). The statement is meant to enhance consistency in the application of recent accounting and financial reporting standards. The requirements of this statement are effective for reporting periods beginning after June 15, 2017. -25- GASB STATEMENT NO. 86, CERTAIN DEBT EXTINGUISHMENT ISSUES Current GASB guidance requires that debt be considered defeased in substance when the debtor irrevocably places cash or other monetary assets acquired with refunding debt proceeds in a trust to be used solely for satisfying scheduled payments of both principal and interest of the defeased debt. This new standard establishes essentially the same requirements for when a government places cash and other monetary assets acquired with only existing resources in an irrevocable trust to extinguish the debt. The primary objective of this statement is to improve consistency in accounting and financial reporting for in-substance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources—resources other than the proceeds of refunding debt—are placed in an irrevocable trust for the sole purpose of extinguishing debt. This statement also improves accounting and financial reporting for prepaid insurance on debt that is extinguished a nd notes to financial statements for debt that is defeased in substance. The requirements of this statement are effective for reporting periods beginning after June 15, 2017. GASB STATEMENT NO. 87, LEASES A lease is a contract that transfers control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange -like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this statement. Governments enter into leases for many types of assets. Under the previous guidance, leases were classified as either capital or operating depending on whether the lease met any of four tests. In many cases, the previous guidance resulted in reporting lease transactions differently than similar nonlease financing transactions. The goal of this statement is to better meet the information needs of users by improving accounting and financial reporting for leases by governments. It establishes a single model for lease accounting based on the principle that leases are financings of the right to use an underlying asset. This statement increases the usefulness of financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. Under this statement, a lessee is required to recognize a lease liability and an intangible right -to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. To reduce the cost of implementation, this statement includes an exception for short -term leases, defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract. The requirements of this statement are effective for reporting periods beginning after December 15, 2019. THIS PAGE INTENTIONALLY LEFT BLANK