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9.a) Auditors Report and Financial Statements for Year Ended December 31, 2011-CliftonLarsonAllen Meeting Date: 4/17/2012 Agenda Item: G� � � City Council Agenda Report City of Scandia 14727 209th St. North Scandia, MN 55073 (651) 433-2274 Action Requested: Accept the Auditors Report and Financial Statements for the year ended December 31, 2011 and direct publication of the summary financial statement as required by state law. Deadline/Timeline: N/A Background: Representatives of CliftonLarsonAllen will be at the April 17 City Council meeting to present the audit report and answer any questions. Recommendation: I recommend that the Council receive the report and, unless additional discussion is needed at a subsequent meeting, accept the report. Attachments/ • Letter to City Council from CliftonLarsonAllen for Year Ended Materials provided: December 31, 2011 • Financial Statements for Year Ended December 31, 2011 ContaCt(s): Dennis Hoogeveen, Partner John Lorenzini, Senior CliftonLarsonAllen, 612-376-4500 Prepared by: Anne Hurlburt, Administrator (audit 2011) Page 1 of 1 04/13/12 � , CliftanLarsonWfen LLP �. v�nr✓uv.c[iftonlarsonallen.cam CliftanLarsonAtlen c�ty coun�il City of Scandia Scandia, Minnesota We have audited the financial statements of the governmental activities, tbe business-type activities, each major fund, and the aggregate remaining fund information of the City of Scandia, Minnesota (the City) for the year ended December 31, 2011, and have issued our report thereon dated April 6, 2012. Professional standards require that we provide you with the following information relatcd to our audit. Our responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter dated February 6, 2012, our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. 1. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. 2. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. 3. We are also responsible for communicating matters regarding the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions,promulgated by the State Auditor pursuant Minnesota Statute 6.65. Planned scope and timing of the audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on February 6, 2012. Significant audit findings Qualitative aspects of accounting practices Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. 'I'he significant accounting policies used by City of Scandia are described in Note 1 to the financial statements. As discussed in Note 1 to the financial statements, the City adopted GASB 54,Fund Balance Reporting and Governmerttal Fund Tvpe Defnitions. Aside from the implementation of this standard, no other accounting policies were adopted and the application of existing policies was not changed during 2011. City Council City of Scandia Page 2 Significant audit findings (continued) Qualitative aspects of accounting practices (continued) We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance ar consensus. All significant transactions have bcen recognized in the financial statements in the proper period. 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. Tbe most sensitive estimate affecting the financial statements was: Estimated useful lives of depreciable capital assets - Management's estimate of useful lives for depreciable assets is based on guidance recommended by authoritative accounting literature and past experiences. The useful life of a depreciable asset determines tbe amount of depreciation that will be recorded in any given reporting period as well as the amount of accumulated depreciation that is reported at the end of a reporting period. We evaluated the key factars and assumptions used to develop the above estimates in determining that it is reasonable in relation to the 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. Corrected and uncorrected misstatements Professional standards require us to accumulate all known and likely misstatemcnts identified during the audit, other than thosc that are trivial, and communicate them to the appropriate level of management. We proposed audit adjustments to convert the City's records from cash to accrual basis as a result of audit procedures in the areas of cash, receivables, accounts payable, accrued liabilities, fund balance, net assets, revenues and expenditures. These audit adjustments were recorded by management. Disagreements with management For purposes of this letter, professional standards define a disagreement with managemcnt 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 auditors' 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 Apri16, 2012. City Council Ciry of Scandia Page 3 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 Ciry's financial statements ar a determination of the type of auditors' 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 information in documents containing audited financial statements Our responsibility for the supplementary information accompanying the financial statements, as described by professional standards, is to evaluate the presentation of the supplementary information in relation to the financial statements as a whole and to report on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. With respect to the supplementary 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 tbe information complies with U.S. generally accepted accounting principles, 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 have issued our report thereon dated April 6, 2012. Other information is being included in documents containing the audited financial statements and the auditors' report thereon. Our responsibility for such other information does not extend beyond the financial information idcntified in our auditors' report. We have no responsibility for determining whether such other information is properly stated and do not have an obligation to perform any procedures to corroborate other information contained in such documents. As required by professional standards, we read the other information in order to identify material inconsistencies between the audited financial statements and the other inforination. We did not identify any material inconsistencies between the other information and the audited financial statements. With respect to the required supplementary information (RSI) accompanying the financial statements, we made certain inquiries of management about the methods of preparing the RSI, including wbether the RSI has been measured and presented in accordance with prescribed guidelines, whether the methods of ineasurement and preparation have been changed from the prior period, and whether there were any significant assumptions or interpretations underlying the measurement or presentation of the RSL We compared the RSI for consistency with management's responses to the foregoing inquiries, the basic financial statements, and other knowledge obtained during the audit of the basic financial statements. Because these limited procedures do not provide sufficient evidence, we did not express an opinion or provide any assurance on the RSI. Our auditors' opinion, the audited financial statements, and the notes to financial statements should only be used in their entirery. Inclusion of the audited financial statements in a document you prepare, such as an annual report, should be done only with our prior approval and review of the document. * * * * * * Ciry Council City of Scandia Page 4 This report is intended solely for the use of the City Council and management of the City of Scandia and is not intended to be and should not be used by anyone other than these specified parties. ;�.�.��r.��'z%,�.�'L..� CliftonLarsonAllen LLP Minneapolis,Minnesota April 6, 2012 dll�allVuos�e�uou!I�ZLOZO • t°,� � � ■� � L � � O � a� .- � tw rl +� +� � � Q f� � co C� N �� � � � � V � � � � � m � = � � > '� � a� a� � � '� y-- � o o � O � v = o � � N J � � o - � .� }+ p � � o .� o � V Q ' � � � ' C � � ' �. ... � ' "'�t � ' ' ' ' ' � � � v �1 , a i/1 W C ' V/ � a � � � J O C O �� � U ' � N ti � � V � ' ' c� � � Q � � � ' � .� — � cn � � ' O a--' . ca U � _ � � � 1 � � � � � � � '— • ._ V c� ' � � � � � � � � � � � , • oc Q i.i z ' • • • • � N ' ' � � ' C � � , � � � � ' �4 � ' � � � � , � � � � � � � � ' � � � � ' • � � � � � � ' � � O � � J J , � � C v 1 L� a ' � � •� (n o a--+ a--� � � � � � � O ° � � N cn .— � ' � � N � �A � �, � � _ � � o cn •— � � � ' � � Q � Q. � � � N O ' O � N �U `� •�, c.) � U � � ' � � � � � . • > � � > � , 0 U � _ N � 1 Q � v � N � •— y-- � > +� � �+— aJ •— ' � � �� � � � � � c�n .� � � � ' � Q ca v� I Z oC � • • • • � m � ' � � ' C � , � � � � ' ^� �� � ' � U ' ` ` . � � � ' `� U O � � ' � Q �+– cn t�0 � ._ �, � � , � C� � � O � � � O � � � � � � V � o , � � � � � � /�� J � L - �\/ � w T O � � • � ry , � '}'i �U Q ~ 0 (/') (n tn � � � o � � ,� �, � �„ O U � V � '-E- +-+ V � � � � � � � ' � � � � s � � .Q �-' � -� � �- � � � .— tf� �+– � O cn 0 N � p � � ,� � c.� . ca � U a,o .� � O � ' •— � c� N � +-' N � ' V � � � � � � — ' � '� � � > � � O � � •Q +, cr� O Q ,_ Z ' i..� O � I I I � I � • • • � � � ' � ' a � I � 1 �� , � �� � � �`' o�o � � a�i a�i � � a `� ,� � rn o oi ' � � � �i � N °,�' � � � v? �� � � � � � � � � ;:;i; �. � � �� �� � ,���� � � �� � rn ' � � v .� � rn ^ m m v N m � � � m �o � oo rn � � o m rn � � m � �' c� � � n �n n � �� � � � � � ri :,� � ' N �� � � 3 � ' � a � v ' i � N c l!'1 N N lf1 C/) � � � � m rn oo � � � p o m �n o u�, oo � LL � v � o`r'o v�i u�i � o � � � � � � � ' I � N I W Q � ' I V • � I � , � , � 1 � � � �.;� o m rn n� N �� o0 00 �n � �n m �? 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N ' � '--1 s .� o � -� 1 • � � 1 � =' . � �=�� � L ;•�~�i ' � '--)i � r�� � v m �'�'I ' � O '.�� a�io m �: 1 � r\ -�� � O M _� _ � � ' ` •� r-I . ^E l0 � �- ' � � �� � � -�! N c-1 ' ' , ' ' CITY OF SCANDIA, MINNESOTA ' FINANCIAL STATEMENTS AND SUPPLEMENTARYINFORMATION ' YEAR ENDED DECEMBER 31, 2011 , ' City of Scandia � 14727 209th Street North ' Scandia, Minnesota 55073 ' ' ' ' ' , ' ' ' ' CITY OF SCANDIA, MINNESOTA TABLE OF CONTENTS ' YEAR ENDED DECEMBER 31, 2011 tI. INTRODUCTORY SECTION ' Elected and Appointed Officials II. FINANCIAL SECTION ' Independent Auditors' Report 1 REQUIRED SUPPLEMENTARY INFORMATION ' Management's Discussion and Analysis 3 Basic Financial Statements ' Statement of Net Assets 13 Statement of Activities 14 ' Balance Sheet— Governmental Funds 16 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Governmental Activities 17 ' Statement of Revenues, Expenditures, and Changes in Fund Balance — Governmental Funds 18 ' Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities — Governmental Activities 19 ' Statement of Net Assets — Proprietary Funds 20 Statement of Revenues, Expenses, and Changes in Net Assets — Proprietary ' Funds 21 Statement of Cash Flows — Proprietary Funds 22 Statement of Net Assets— Fiduciary Fund 23 ' Notes to Basic Financial Statements 24 Required Supplementary Information — Budgetary Comparison Information ' Schedule of Revenues, Expenditures and Changes in Fund Balance — Budget and Actual — General Fund 42 ' Notes to Required Supplementary Information 44 Combining Fund Financial Statements , Combining Balance Sheet— Nonmajor Governmental Funds 45 Combining Statement of Revenues, Expenditures and Changes in Fund Balance — Nonmajor Governmental Funds 46 ' Statement of Changes in Assets and Liabilities — Fiduciary Funds 47 ' ' ' CITY OF SCANDIA, MINNESOTA TABLE OF CONTENTS (CONTINUED) ' YEAR ENDED DECEMBER 31, 2011 ' III. OTHER REQUIRED REPORTS ' Report on Minnesota Legal Compliance 48 Report on internai Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with ' Government Auditing Standards 49 , ' ' ' ' ' ' ' ' , ' ' , ' ' ' ' t ' ' I. ' INTRODUCTORY SECTION ' ' 1 , ' ' ' � ' , ' ' ' CITY OF SCANDIA, MINNESOTA ELECTED AND APPOINTED OFFICIALS , DECEMBER 31, 2011 ' ' Elected Position , Randall Simonson Mayor ' Connie Amos Council Member Chris Ness Council Member , Sally Swanson Council Member Jim Schnieder Council Member ' Appointed ' Anne Huriburt Administrator ' Colleen Firkus Treasurer Brenda Eklund Deputy Clerk ' ' ' ' ' ' ' , � ' ' ' ' , ' II. ' FINANCIAL SECTION ' ' ' ' ' , ' ' ' ' , ' ' ' �� CliftonLarsonAllen LLP tivww.cl iftoniarsonallen.com CliftonLarsonAllen � , INDEPENDENT AUDITORS' REPORT ' ' Honorable Mayor Members of the City Council and Citizens City of Scandia, Minnesota ' We have audited the accompanying financial statements of the governmental activities, the business- type activities, each major fund, and the aggregate remaining fund information of the City of Scandia, ' Minnesota as of and for the year ended December 31, 2011, which collectively comprise the City's basic financial statements as listed in the tabie of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. ' We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing ' Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the ' amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our ' opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the ' respective financial position of the governmentai activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Scandia, Minnesota as of December 31, 2011, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the , United States of America. As discussed in the notes to the basic financial statements, the City adopted the provisions of ' Government Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, as of and for the year ended December 31, 2011. The statement results in the City reporting nonspendable, restricted, assigned, and unassigned fund balances in its ' governmental funds. , ' ' (1) Honorable Mayor ' Members of the City Council and Citizens ' In accordance with Government Auditing Standards, we have also issued a report dated April 6, 2012 ' on our consideration of the City of Scandia, Minnesota's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and ' other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit ' performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the ' management's discussion and analysis and budgetary comparison information as listed on the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, ' who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally ' accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with managemenYs responses to our inquiries, the basic financial statements, and other knowledge we ' obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. ' Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining fund financial statements are presented for purposes of additional analysis and are not a required part of the basic financial ' statements. The combining fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the ' audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in , accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ' Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section is presented for purposes of additional analysis and is not a required part of the basic financial statements. 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. ' �L LL� CliftonLarsonAllen LLP ' Minneapolis, Minnesota April 6, 2012 ' (2) ' ' , ' ' ' , REQUIRED SUPPLEMENTARY INFORMATION , ' � ' ' ' ' ' ' ' ' ' ' ' CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS � YEAR ENDED DECEMBER 31, 2011 ' As management of the City, we offer readers of the City's financial statements this narrative overview � and analysis of the financial activities of the City for the fiscai year ended December 31, 2011. Financial Highlights � o The City's net assets of its governmental activities increased by $214,468 during the year to $10,249,522 at year-end. o The total fund balance of the General Fund increased by $155,023 during the year to ' $1,253,676 at year-end. o The net assets of the City's business-type activities (201 Sewer Enterprise Fund) decreased by ' $27,266 during the year to $1,030,302. Overview of the Financial Statements ' This discussion and analysis is intended to serve as an introduction to the City's basic financial statements. The City's basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report ' also contains other supplementary information in addition to the basic financial statements. Government-Wide Financial Statements ' The government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private-sector business. ' The statement of net assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. ' The statement of activities presents information showing how the City's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses ' are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). ' Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges ' (business-type activities). The governmental activities of the City include general government, public safety, public works, parks and recreation, and other. The only business-type activities of the City are the sewer operations. ' The government-wide financial statements can be found on pages 14-16 of this report. ' ' ' (3) CITY OF SCANDIA MINNESOTA � � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2011 � ' Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been � segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into two categories: governmental funds and proprietary funds. � Governmental Funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the ' government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government's near-term financing requirements. ' Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar ' information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact by the governmenYs near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of ' revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains several individual governmental funds. Information is presented separately in the , governmental fund balance sheet and in the governmental fund statement of revenues, expenditures and changes in fund balances for the General Fund, 2007 Improvement Bond Debt Service Fund, and the Equipment Replacement Capital Project Fund. Data from the other governmentai funds are � combined into a singie, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in these financial statements. ' The City adopts an annual appropriated budget for its General Fund. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget. ' The basic governmental fund financial statements can be found on pages 16-19 of this report. Proprietary Funds. The proprietary funds are used to report the same functions presented as , business-type activities in the government-wide financial statements. The City uses enterprise funds to account for its business-type activities. Proprietary funds provide the same type of information as the government-wide financial statements, ' only in more detail. The proprietary fund financial statements provide separate information for the 201 Sewer Enterprise Fund which is considered to be a major fund of the City. ' , ' (4) ' ' CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2011 ' Fund Financial Statements (Continued) ' Proprietary Funds (Continued) The basic proprietary fund financial statements can be found on pages 20-22 of this report. ' Notes to Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to financial statements can be found on , pages 24-41 of this report. Other Information , The combining statements referred to earlier in connection with nonmajor governmental funds are presented immediately following the notes to financial statements. Combining and individual fund statements and schedules can be found on pages 45-46 of this report. ' Government-Wide Financial Analysis The City's financial statements are presented in accordance with the requirements of Governmental , Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis-for State and Local Governments. Comparative information is included in these tables to highlight changes in financial position, shown in Exhibits 1-2. ' The government-wide statements report the City's net assets and how they have changed. Net assets, the difference between the City's assets and liabilities, are one way to measure the City's financial position. Over time, increases or decreases in the City's net assets can be used as an indicator of the ' City's financial position. The City's financial position is the product of many factors. For example, the determination of the City's , investment in capital assets, net of related debt involves many assumptions and estimates, such as current and accumulated depreciation amounts. A conservative versus a liberal approach to depreciation estimates, as well as capitalization policies, will produce a very significant difference in the ' calculated amounts. For these reasons, it is important to view the net assets balance as a starting point to evaluate future years' results, rather than to focus on the current balance. ' ' , ' ' ' (5) CITY OF SCANDIA, MINNESOTA ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2011 ' ' EXHIBIT 1: CITY OF SCANDIA'S NET ASSETS Governmental Activities Business-Type Activities Totals ' 2011 2010 2011 2010 2011 2010 Current and Other Assets $ 2,632,021 $ 2,190,041 $ 219,098 $ 196,684 $ 2,851,119 $ 2,386,725 Capital Assets,Net 9,401,146 9,623,907 840,000 870,000 10,241,146 10,493,907 ' Total Assets 12,033,167 11,813,948 1,059,098 1,066,684 13,092,265 12,880,632 Current Liabilities 247,863 169,408 28,796 9,116 276,659 178,524 Long-Term Liabilities 1,535,782 1,609,486 - - 1,535,782 1,609,486 ' Total Liabilities 1,783,645 1,778,894 28,796 9,116 1,812,441 1,788,010 Net Assets: Invested in Capital Assets ' Net of Related Debt 7,884,454 8,031,460 840,000 870,000 8,724,454 8,901,460 Restricted for Debt Retirement 596,540 509,529 - - 596,540 509,529 Restricted for Road Maintenance 122,573 121,144 - - 122,573 121,144 Unrestricted 1,645,955 1,372,921 190,302 187,568 1,836,257 1,560,489 ' Total NetAssets $ 10,249,522 $ 10,035,054 1,030,302 1,057,568 11,279,824 11,092,622 As noted earlier, net assets may serve over time as a useful indicator of a government's financial ' position. In the case of the City, assets exceeded liabilities by $11,279,824 at the close of the most recent fiscal year. The largest portion of the City's net assets (77%) reflects its investment in capital assets (e.g., land, buildings, machinery and equipment), less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens: , consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to , liquidate these liabilities. The City's debt is repaid primarily through special assessments, property tax levies for debt of governmental activities and user charges provide the financing for the debt of the business-type activities. ' An additional portion of the City's net assets (6%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets ($1,836,257) ' may be used to meet the City's ongoing obligations to citizens and creditors. ' ' ' ' ' (6) , ' CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2011 ' EXHIBIT 2: CHANGES IN NET ASSETS ' Governmental Activities Business-Type Activities Totals 2011 2010 2011 2010 2011 2010 REVENUES ' Proqram Revenues Charges for Services $ 357,179 $ 210,529 $ 66,203 $ 61,236 $ 423,382 $ 271,765 Operating Grants and Contributions 44,380 40,717 44,380 40,717 Capital Grants and Contributions 25,799 36,945 - 5,475 25,799 42,420 ' General Revenues Property Taxes 1,921,044 1,844,625 1,921,044 1,844,625 Grants and Contributions Not Restricted for a Particular Purpose 9,330 9,691 - - 9,330 9,691 ' Other 16,973 22,022 1,205 1,358 18,178 23,380 Total Revenues 2,374,705 2,164,529 67,408 68,069 2,442,113 2,232,598 EXPENSES ' General Government 687,731 451,020 - = 687,731 451,020 Public Safety 425,673 473,909 425,673 473,909 Public Works 848,899 784,751 - - 848,899 784,751 Parks and Recreation 133,215 96,149 - - 133,215 96,149 ' Interest and Fiscal Charges 68,364 72,542 - - 68,364 72,542 Sewer 91,029 67,359 91,029 67,359 Total Expenses 2,163,882 1,878,371 91,029 67,359 2,254,911 1,945,730 � TRANSFERS 3,645 3,645 (3,645) (3,645) - - CHANGE IN NET ASSETS 214,468 289,803 (27,266) (2,935) 187,202 286,868 Net Assets-Beginning of Year 10,035,054 9,745,251 1,057,568 1,060,503 11,092,622 10,805,754 ' NET ASSETS-END OF YEAR 10,249,522 10,035,054 1,030,302 1,057,568 11,279,824 11,092,622 Governmental Activities. Governmental activities increased the City's net assets by $214,468. ' Business-Type Activities. Business-type expenses (the 201 Sewer Enterprise Fund) decreased the City's net assets by $27,266. ' , ' ' ' ' ' (7) CITY OF SCANDIA MINNESOTA ' , MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2011 , The following is a graphical representation of the various sources of the City's governmental revenues (excluding transfers) of$2,374,705: , Governmental Activities Revenue by Source 2011 o Fees,Charges,and ' Other ■OperatingGrantsand o Other General Revenue 15°/o ontributions , 1% � 2% ❑Capital Grantsand — --_ Contributions 1% ' ❑Grants and Contributions n o t Restri cted fo r a ■PropertyTaxes Particula�rPurpose ' 81% 0% ' The following is a graphical representation of the various sources of the City's governmental expenses ' of$2,163,882 and program revenues of$427,358: Expenses and Program Revenues- Governmental Activities ' $900,000 --- ---- -- o Expenses 'i ' $800,000 ■Program Revenues � $700,000 $600,000 ' $500,000 II $400,000 � ' $300,000 I $200,000 � , $100,000 I $- 'General Government Public Safety Public Works Parks and Interest and Fiscal Recreation Charges , ' �8) ' ' CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2011 ' The followin is a ra hical re resentation of the various sources of the Cit 's business-t e revenues 9 9 p P Y YP ' of$67,408: Business-Type Activities Revenue by Source 2011 ' Oth er r2% I ' - - � — - - � _ -- -- ' �,� . .��`�... �.� ' Ch arg es fo r Serv ices 98% ' The following is a graphical representation of the various sources of the City's business-type expenses ' of$91,029 and program revenues of$66,203: Expenses and Program Revenues-Business-Type Activities ' $95,000 ' ❑Expenses � ■Program Revenues i ' � $85,000 � ' ' $75,000 � � ' $65,000 ' Sewer ' ' (9) CITY OF SCANDIA, MINNESOTA ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2011 ' ' Financial Analysis of the GovernmenYs Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance- , related legal requirements. Governmental Funds. The focus of the City's governmental funds is to provide information on near- ' term inflows, outflows and balances of spendab/e resources. Such information is useful in assessing the City's financing requirements. In particular, unassigned fund ba/ance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. At of the end of the current fiscal year, all of the City's governmental funds together reported combined ' ending fund balances of $2,177,482, an increase of $413,569 in comparison with the prior year. Of the $2,177,482 fund balance, 73% ($1,583,285) constitutes unrestricted fund balance, which is available ' for spending at the City's discretion. The unrestricted fund balance is broken into two categories, assigned and unassigned. Unassigned fund balance represents 51°/o ($1,107,750) and assigned fund balance represents 22% ($475,535). The remainder of the fund balance consists of nonspendable and ' restricted fund balance. Nonspendable fund balance constitutes 1% ($23,353) and restricted fund balance constitutes 26% ($570,844). The General Fund is the chief operating fund of the City. At the end of the current year, fund balance of ' the General Fund was $1,253,676, an increase of $155,023 over the prior fiscal year. Key factors in this change in fund balance are as follows: , o Actual expenditures totaled $1,715,854 (excluding transfers) for 2011 compared to budgeted expenditures of$1,856,441, a net favorable variance of$140,587. o Actual revenues totaled $1,977,232 for 2011 compared to budgeted revenues of $1,978,028, a ' net unfavorable variance of $796 (before transfers). Revenue from Zoning and Hearing Fees were $50,632 less than budgeted due to the timing of reimbursements for planner services. Licenses and permit revenue was $15,207 more than budgeted, and intergovernmental revenue ' was $31,345 more than budgeted due to better than anticipated building activity and state aids. Because property tax revenues are not received until the middle of the budget year, it is important that ' the City carry fund balances sufficient to cover anticipated expenses for the first half of the budget year. If not, the City would be forced to borrow (and pay interest on) the funds necessary to meet basic expenses such as payroll. The $1,107,750 of unassigned fund balance in the General Fund is ' adequate for cash flow purposes. ' , ' , (10) ' ' CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2011 ' General Fund Budgetary Highlights ' Detail of the General Fund original budget, final budget and actual revenues and expenditures can be found beginning on page 42 of this report. The net change in the General Fund Balance was $155,023. The City Council approved the following budget amendments during the year: ' o Increase miscellaneous revenues (donations and other) by $4,283 due to additional donations to be used to purchase rescue equipment. ' o Increase capital outlay expenditures increased by $4,283 to purchase rescue equipment. o Decreased salary expenditures by $14,505 due to changes in staffing. Actual expenditures were less than budgets in several departments. Spending in the Public Works ' Department was $88,262 less than budgeted (largely due to under-spending for contractual road maintenance, engineering, and gravel/salt budgets), spending in the Public Safety Department was $35,282 less than budgeted ($22,441 related to fire and $9,157 related to police), and spending in the ' General Government departments (Administration, and Finance, Elections, Planning and Building and City Council) was $26,634 less than budgeted, which largely explains the net spending of $140,587 less than the overall General Fund Budget.. ' Proprietary Funds. The City's proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. ' Unrestricted net assets of the 201 Sewer operations at the end of the year amounted to $193,269. Capital Asset and Debt Administration ' Capital Assets. The City's investment in capital assets for its governmental and business type activities as of December 31, 2011, amounts to $10,241,146 (net of accumulated depreciation). This investment in capital assets includes land, construction in process, buildings, equipment and vehicles, ' other improvments, the sewer system, and infrastructure. This represents a decrease in the City of Scandia's investment in capital assets (net of accumulated depreciation) of 2.4%. CITY OF SCANDIA'S CAPITAL ASSETS ' (Net of Depreciation) Governmental Business-Type Activities Activities Totals ' 2011 2010 2011 2010 2011 2010 Land $ 487,735 $ 487,735 $ - $ - $ 487,735 $ 487,735 Construction in Process 111,852 39,295 - - 111,852 39,295 ' Buildings 2,232,670 2,193,375 = = 2,232,670 2,193,375 Equipment and Vehicles 1,371,717 1,334,741 1,371,717 1,334,741 Infrastructure 9,359,242 9,353,763 - - 9,359,242 9,353,763 Other Improvements 162,647 162,647 - - 162,647 162,647 ' SewerSystem - - 1,500,000 1,500,000 1,500,000 1,500,000 Less:Accumulated Depreciation (4,324,717) (3,947,649) (660,000) (630,000) (4,984,717) (4,577,649) Total $ 9,401,146 $ 9,623,907 $ 840,000 $ 870,000 $ 10,241,146 $ 10,493,907 ' ' ' (11) CITY OF SCANDIA, MINNESOTA ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2011 ' ' Capital Asset and Debt Administration (Continued) Long-Term Debt. At the end of the current fiscal year, the City had total bonded debt outstanding of ' $1,540,000. All debt is backed by the full faith and credit of the City. CITY OF SCANDIA'S OUTSTANDING DEBT ' (General Obligation) Governmental Activities Business-Type Activities Totals 2011 2010 2011 2010 2011 2010 ' LONG-TERM OBLIGATIONS Long-Term Debt: General Obligation Notes $ 1,540,000 $ 1,620,000 $ - $ - $ 1,540,000 $ 1,620,000 Unamortized Bond Discount (23,308) (27,553) - - (23,308) (27,553) ' Compensated Absences 19,090 17,039 - - 19,090 17,039 Total $ 1,535,782 $ 1,609,486 �- �- 1,535,782 $ 1,609,486 Additional information on long-term debt is presented in Note 4 of this report. ' Economic Factors and Next Year's Budgets and Rates o The City Council has approved a balanced budget for the General Fund for 2012. Staff will ' continually monitor the budget and recommend any revisions that are deemed necessary to the City Council. o During the current economic downturn the City will continue to experience slow or no growth, ' and the revenues from permits and interest income will continue to be below historic levels. Staff will continue to monitor the changes in this area to prepare for 2013 budget discussions, ' which will begin in June of 2012. Requests for Information ' This financial report is designed to provide a general overview of the City's finances for all those with an interest in the City's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the City of Scandia, 14727 ' 209th St. N., Scandia, Minnesota 55073 (telephone 651-433-2274). , ' ' , ' (12) ' ' ' ' ' , ' BASIC FINANCIAL STATEMENTS � , , ' , ' ' ' ' ' 1 ' ' ' CITY OF SCANDIA, MINNESOTA STATEMENT OF NET ASSETS , DECEMBER 31, 2011 , Governmental Business-Type ' Activities Activities Totals ASSETS Cash and Investments $ 2,366,775 $ 204,889 $ 2,571,664 Receivables: ' Taxes and Other 74,725 7,288 82,013 Special Assessments 153,901 6,921 160,822 Unamortized Issuance Costs 13,267 - 13,267 , Prepaid Items 18,253 = 18,253 I nventory 5,100 5,100 Capital Assets, Non Depreciable 599,587 - 599,587 ' Capital Assets, Net of Accumulated Depreciation 8,801,559 840,000 9,641,559 Total Assets 12,033,167 1,059,098 13,092,265 ' LIABILITIES Accounts and Contracts Payable 214,457 28,796 243,253 Accrued Payroll, Taxes and Benefits 23,663 - 23,663 Interest Payable 6,813 - 6,813 , Unearned Revenue 2,930 - 2,930 Noncurrent Liabilities: Due Within One Year 319,035 - 319,035 ' Due in More Than One Year 1,216,747 - 1,216,747 Total Liabilities 1,783,645 28,796 1,812,441 ' NET ASSETS Invested in Capital Assets, Net of Related Debt 7,884,454 840,000 8,724,454 Restricted for Debt Retirement 596,540 - 596,540 ' Restricted for Road Maintenance 122,573 - 122,573 Unrestricted 1,645,955 190,302 1,836,257 Total Net Assets $ 10,249,522 $ 1,030,302 $ 11,279,824 ' ' ' ' ' ' See accompanying Notes to Basic Financial Statements. ' (13) CITY OF SCANDIA, MINNESOTA ' STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2011 ' , Program Revenues ' Operating Capital Grants Charges for Grants and and FUNCTIONS/PROGRAMS Expenses Service Contributions Contributions Government Activities: ' General Government $ 687,731 $ 251,084 $ - $ - Public Safety 425,673 32,574 38,307 - Public Works 848,899 22,982 - 25,799 , Parks and Recreation 133,215 43,273 6,073 - Interest and Fiscal Charges 68,364 7,266 - - Total Governmental Activities 2,163,882 357,179 44,380 25,799 ' Business-Type Activities: Sewer 91,029 66,203 - - Total Primary Government $ 2,254,911 $ 423,382 $ 44,380 $ 25,799 ' GENERALREVENUES ' Taxes: Property Taxes, Levied for General Purposes Grants and Contributions not Restricted for a Particular Purpose ' Investment Earnings Gain on Sale of Capital Assets Transfers Total General Revenues ' CHANGE IN NET ASSETS Net Assets - Beginning of Year , NET ASSETS - END OF YEAR ' ' ' ' 1 ' See accompanying Notes to Basic Financial Statements. (14) ' ' ' ' Net Ex ense Revenue and � P ) , Changes in Net Assets Governmental Business-Type Activities Activities Total ' $ (436,647) $ - $ (436,647) (354,792) - (354,792) ' (800,118) = (800,118) (83,869) (83,869) (61,098) - (61,098) ' (1,736,524) - (1,736,524) - (24,826) (24,826) , (1,736,524) (24,826) (1,761,350) ' 1,921,044 - 1,921,044 ' 9,330 = 9,330 15,032 1,205 16,237 1,941 1,941 3,645 (3,645) - , 1,950,992 (2,440) 1,948,552 214,468 (27,266) 187,202 ' 10,035,054 1,057,568 11,092,622 $ 10,249,522 $ 1,030,302 $ 11,279,824 ' ' ' ' ' , ' (15) CITY OF SCANDIA, MINNESOTA ' BALANCE SHEET GOVERNMENTAL FUNDS ' DECEMBER 31, 2011 ' 200� ' Improvement Equipment Nonmajor General Bond Replacement Governmental Fund Debt Service Fund Funds Totals ASSETS ' Cash and Investments $ 1,331,117 $ 226,785 $ 347,046 $ 461,827 $ 2,366,775 Taxes Receivable 59,706 59 - 30 59,795 Special Assessments Receivable - 153,901 - - 153,901 Other Receivables 14,930 - - - 14,930 ' Prepaid Items 18,253 - - - 18,253 Inventory 5,100 - - 5,100 Total Assets $ 1,429,106 $ 380,745 $ 347,046 $ 461,857 $ 2,618,754 ' LIABILITIES AND FUND BALANCES Liabitities: Accounts and Contracts Payable $ 102,605 $ - $ 111,852 $ - $ 214,457 ' Accrued Payroll,Taxes and Benefits 23,663 - - - 23,663 Deferred Revenue 49,162 153,960 - 30 203,152 Total Liabilities 175,430 153,960 111,852 30 441,272 Fund Balances: ' Nonspendable: Prepaid Items 18,253 - - - 18,253 Inventory 5,100 - - - 5,100 , Restricted for: Debt Service - 226,785 - 221,486 448,271 Road Maintenance 122,573 - - - 122,573 , Assigned for: Infrastructure Improvement Projects - - - 227,405 227,405 Acquisition and Development of Parks - - - 12,936 12,936 Equipment Replacement - - 235,194 - 235,194 ' Unassigned 1,107,750 - - - 1,107,750 Total Fund Balances 1,253,676 226,785 235,194 461,827 2,177,482 Total Liabilities and Fund Balances $ 1,429,106 $ 380,745 $ 347,046 $ 461,857 $ 2,618,754 ' , ' ' ' ' See accompanying Notes to Basic Financial Statements. (16) ' ' CITY OF SCANDIA, MINNESOTA RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET ' TO THE STATEMENT OF NET ASSETS GOVERNMENTAL ACTIVITIES DECEMBER 31, 2011 ' � TOTAL FUND BALANCES FOR GOVERNMENTAL FUNDS $ 2,177,482 Total net assets reported for governmental activities in the statement of ' net assets is different because: Capital assets used in governmental activities are not financial ' resources and, therefore, are not reported in the funds. Capital Assets $ 13,725,863 ' Less Accumulated Depreciation (4,324,717) 9,401,146 Some receivables, including special assessments, are reported as ' deferred revenue in the fund financial statements but are recognized as revenue when earned in the government-wide statements. These deferred revenues consist of: ' Special Assessments on Tax Roll 46,232 Other Special Assessments 153,990 200,222 ' Bond and equipment certificate issuance costs are reported as expenditures in the governmental funds and are shown as assets net of accumulated amortization on the statement of net assets. 13,267 ' Some liabilities are not due and payable in the current period and, therefore, are not reported in the funds. These liabilities consist of: ' Long-Term Obligations (1,535,782) Accrued Interest on Long-Term Debt (6,813) (1,542,595) ' TOTAL NET ASSETS OF GOVERNMENTAL ACTIVITIES $ 10,249,522 ' ' ' ' ' See accompanying Notes to Basic Financial Statements. ' (17) CITY OF SCANDIA MINNESOTA ' , STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE ' GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2011 ' 200� Improvement Equipment Nonmajor Total � General Bond Replacement Governmental Governmental Fund DebtService Fund Funds Funds REVENUES Taxes $ 1,559,659 $ 179,529 $ - $ 210,884 $ 1,950,072 ' Special Assessments - 47,418 - - 47,418 intergovernmental Revenue 62,992 - - - 62,992 Licenses and Permits 63,092 - - - 63,092 Charges for Services 250,195 - - - 250,195 ' Fines and Forteits 19,110 - - - 19,110 User Fees - - - 3,000 3,000 Miscellaneous Revenue 22,184 1,231 1,453 2,664 27,532 Total Revenues 1,977,232 228,178 1,453 216,548 2,423,411 ' EXPENDITURES Current: General Government 672,362 - - 2,500 674,862 ' Public Safety 377,178 - - - 377,178 Public Works 548,326 - - - 548,326 Parks and Recreation Center 115,495 - - 5,479 120,974 Debt Service: ' Principal Payments - 135,000 - 95,000 230,000 Interest Payments - 35,980 - 26,242 62,222 Capital Outlay: General Government 1,563 - - - 1,563 ' Pubiic Safety 930 - 148,827 - 149,757 Public Works - - - 546 546 Total Expenditures 1,715,854 170,980 148,827 129,767 2,165,428 EXCESS OF REVENUES OVER ' (UNDER)EXPENDITURES 261,378 57,198 (147,374) 86,781 257,983 OTHER FINANCING SOURCES(USES) Proceeds from Sale of Equipment - - 1,941 - 1,941 ' Issuance of Equipment Certificates - - 150,000 - 150,000 Transfer in 3,645 - 110,000 - 113,645 Transfer Out (110,000) - - - (110,000) Total Other Financing Sources(Uses) (106,355) - 261,941 - 155,586 ' NET CHANGE IN FUND BALANCES 155,023 57,198 114,567 86,781 413,569 Fund Balances-Beginning of Year 1,098,653 169,587 120,627 375,046 1,763,913 ' FUND BALANCES -END OF YEAR $ 1,253,676 $ 226,785 $ 235,194 $ 461,827 _$ 2,177,482 ' ' ' ' See accompanying Notes to Basic Financial Stafements. (18) ' ' CITY OF SCANDIA, MINNESOTA RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, ' EXPENDITURES, AND CHANGES IN FUND BALANCE TO THE STATEMENT OF ACTIVITIES GOVERNMENTAL ACTIVITIES YEAR ENDED DECEMBER 31, 2011 ' ' NET CHANGE IN FUND BALANCES-TOTAL GOVERNMENTAL FUNDS $ 413,569 Amounts reported for governmental activities in the statement of activities are ' different because: Capital outlays are reported as expenditures in governmental funds. However, in the statement of activities, the cost of capital assets is allocated over their ' estimated useful lives as depreciation expense. This is the amount by which depreciation exceeded capital outlays in the current period. , Capital Outlays Reported in Governmental Fund Statements $ 154,307 Depreciation Expense (377,068) (222,761) Receivables not currently available are reported as deferred revenue in the fund ' financial statements, but are recognized as revenue when earned in the government-wide statements. (50,647) The governmental funds report bond proceeds as financing sources, while ' repayment of bond principal is reported as an expenditure. In the statement of net assets, however, issuing debt increases long-term liabilities and does not affect the statement of activities and repayment of principal reduces the liability. Also, , governmental funds report the effect of issuance costs, premiums and discounts when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. Interest is recognized as an expenditure in the governmental funds when it is due. In the statement of activities, however, ' interest expense is recognized as it accrues, regardless of when it is due.The net effect of these differences in the treatment of general obligation debt and related items is as follows: ' Issuance of Equipment Certificates (150,000) Equipment Certificate Issuance Costs 2,500 Repayment of Bond Principal 230,000 ' Change in Accrued Interest Expense 548 Amortization of Equipment Certificate Issuance Costs (699) Amortization of Bond Issuance Costs (1,746) ' Amortization of Bond Discount (4,245) 76,358 In the statement of activities, compensated absences are measured by the amounts earned during the year. In the governmental funds, however, ' expenditures for these items are measured by the amount of financial resources used (generally, the amounts actually paid). During the year, the balance of compensated absences payable decreased. (2,051) ' CHANGE IN NET ASSETS OF GOVERNMENTAL ACTIVITIES $ 214,468 ' ' See accompanying Notes to Basic Financial Stafements. ' (19) CITY OF SCANDIA MINNESOTA ' � STATEMENT OF NET ASSETS PROPRIETARY FUND ' DECEMBER 31, 2011 , Sewer ' Enterprise ASSETS Fund Current Assets: Cash and Investments $ 204,889 , Special Assessments Receivable 6,921 Other Accounts Receivable 7,288 Total Current Assets 219,098 ' Noncurrent Assets: Capital Assets: ' Collection Systems 1,500,000 Less: Accumulated Depreciation (660,000) Total Capital Assets 840,000 , Total Assets 1,059,098 LIABILITIES , Current Liabilities: Accounts Payable 28,796 � NET ASSETS Invested in Capital Assets 840,000 ' Unrestricted 190,302 Total Net Assets $ 1,030,302 ' ' ' ' ' ' ' See accompanying Notes to Basic Financial Statements. (20) ' ' CITY OF SCANDIA, MINNESOTA STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS ' PROPRIETARY FUND YEAR ENDED DECEMBER 31, 2011 , ' Sewer Enterprise Fund OPERATING REVENUES ' Charges for Service $ 66,203 OPERATING EXPENSES ' Depreciation 30,000 Utilities 1,726 Maintenance and Other 59,303 tTotal Operating Expenses 91,029 OPERATING LOSS (24,826) , NONOPERATING REVENUE Interest Revenue 1,205 ' LOSS BEFORE TRANSFERS (23,621) TRANSFERS ' Transfer Out (3,645) CHANGE IN NET ASSETS (27,266) , Net Assets - Beginning of Year 1,057,568 NET ASSETS - END OF YEAR $ 1,030,302 ' ' ' ' ' ' ' See accompanying Notes to Basic Financial Statements. ' (21) CITY OF SCANDIA MINNESOTA ' , STATEMENT OF CASH FLOWS , PROPRIETARY FUND YEAR ENDED DECEMBER 31, 2011 ' Sewer , Enterprise Fund CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 66,157 , Cash Paid to Suppliers for Goods and Services (41,349) Net Cash Provided by Operating Activities 24,808 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES ' Transfer Out (3,645) CASH FLOWS FROM INVESTING ACTIVITIES ' Interest on Investments 1,205 NET INCREASE IN CASH AND CASH EQUIVALENTS 22,368 ' Cash and Deposits- Beginning of Year 182,521 CASH AND DEPOSITS - END OF YEAR $ 204,889 ' RECONCILIATION OF OPERATING LOSS TO ' NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Loss $ (24,826) Adjustments to Reconcile Operating Loss to ' Net Cash Provided by Operating Activities: Depreciation Expense 30,000 Changes in Asset and Liability Accounts: ' Decrease in Special Assessments Receivable 1,309 Decrease in OtherAccounts Receivable (1,355) Increase in Accounts Payable 19,680 ' Net Cash Provided by Operating Activities $ 24,808 ' ' , ' ' See accompanying Notes to Basic Financial Statements �22� ' ' CITY OF SCANDIA, MINNESOTA STATEMENT OF NET ASSETS ' FIDUCIARY FUND DECEMBER 31, 2011 , ' Agency Fund ASSETS Current Assets: Cash and Investments $ 117,788 ' LIABILITIES ' Current Liabilities: Contractor Deposits $ 117,788 , ' ' ' ' ' ' , ' ' , ' See accompanying Notes to Basic Financial Statements. ' (23) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 , ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Scandia (City) is a public corporation formed under Minnesota Statute 412. As , such, the City is under statutory city regulations and applicable statutory guidelines. The basic financial statements of the City have been prepared in conformity with U.S. ' generally accepted accounting principles as applied to governmental units by the Governmental Accounting Standards Board (GASB). The following is a summary of the significant accounting policies: ' A. FINANCIAL REPORTING ENTITY As required by U.S. generally accepted accounting principles, the financial statements ' of the reporting entity include all funds, departments, agencies, boards, commissions, and other organizations over which City officials exercise oversight responsibility. ' Component units are legally separate entities for which the City (primary government) is financially accountable, or for which the exclusion of the component unit would render the financial statements of the Primary Government misleading. The criteria used to ' determine if the Primary Government is financially accountable for a component unit include whether or not the Primary Government appoints the voting majority of the potential component uniYs governing body, is able to impose its will on the potential ' component unit, is in a relationship of financial benefit or burden with the potential component unit, or is fiscally depended upon by the potential component unit. Based on these criteria, there are no organizations considered to be component units of ' the City. ' ' ' , ' ' ' �24� ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS , DECEMBER 31, 2011 ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ' B. BASIC FINANCIAL STATEMENTS 1. Government-Wide Statements , The government-wide financial statements (i.e., the statement of net assets and the statement of activities) display information about the primary government. These ' statements include the financial activities of the overall City government, except for fiduciary activities. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type ' activities, which rely to a significant extent on fees and charges to external parties for support. As a generai rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are ' charges between the City's enterprise fund and various other functions of government. Eliminations of these charges would distort the direct costs and program revenues reported for the various functions concerned. ' In the government-wide statement of net assets, both the governmental and business-type activities columns: (a) are presented on a consolidated basis by column; and (b) are reported on a full accrual, economic resource basis, which ' recognizes all long-term assets and receivables as well as long-term debt and obligations. The City's net assets are reported in three parts: (1) invested in capital assets, net of related debt; (2) restricted net assets; and (3) unrestricted net assets. , The statement of activities demonstrates the degree to which the direct expenses of each function of the City's governmental activities and different business-type , activities are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or activity. Program revenues include: (1) fees, fines, and charges paid by the recipients of goods, services, or privileges provided ' by a given function or activity; and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or activity. Revenues that are not classified as program revenues, including all taxes, are presented as general revenues. ' 2. Fund Financial Statements ' The fund financial statements provide information about the City's funds, including its fiduciary fund. Separate statements for each fund category (governmental, proprietary, and fiduciary) are presented. The emphasis of governmental and ' proprietary fund financial statements is on major individual governmental and enterprise funds, with each displayed as separate columns in the fund financial statements. All remaining governmentai funds are aggregated and reported as ' nonmajor funds. ' ' (25) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' N ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTI G POLICIES (CONTINUED) B. BASIC FINANCIAL STATEMENTS (CONTINUED) , 2. Fund Financial Statements (Continued) Proprietary fund operating revenues, such as charges for services, result from ' exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal ' values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or incidental activities. The City reports the following major governmental funds: ' General Fund ' The General Fund is the City's primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. ' 2007 Debt Service Fund The 2007 Debt Service Fund accounts for debt service payments used to finance the ' City's various improvement projects. Equipment Replacement Fund The Equipment Replacement Capital Project Fund accounts for resources to be ' used to purchase motor vehicles and heavy machinery. The City reports the following major proprietary fund: ' Sewer Fund The Sewer Fund accounts for customer sewer service charges that are used to ' finance sewer operating expenses. Additionally, the City reports the following fiduciary fund: , Aqency Fund To account for assets held as an agent for individuals, private organizations, other , governmental units, and/or other funds. The City's agency fund accounts for pass- through contractor's deposits relating to prospective developments. ' , ' �26� ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED � ) , C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING The government-wide and proprietary fund financial statements are reported using the ' economic resources measurement focus and the accrual basis of accounting. The Agency fund, which is included as a Fiduciary Fund, does not have a measurement focus. Revenues are recorded when earned, and expenses are recorded when a ' liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the ' provider have been met. Private-sector standards of accounting and financial reporting issued on or before ' November 30, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for � their business-type activities and enterprise fund, subject to this same limitation. The City has elected not to follow subsequent private-sector guidance. ' Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. The City considers ' all revenues to be available if they are collected within 60 days after the end of the current period. Property and other taxes, licenses, and interest are all considered to be susceptible to accrual. Expenditures are recorded when the related fund liability is ' incurred, except for principal and interest on general long-term debt, compensated absences, and claims and judgments, which are recognized as expenditures to the extent that they have matured. Proceeds of general long-term debt and acquisitions ' under capital leases are reported as other financing sources. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. ' Amounts reported as program revenues include: (1) Charges to customers or applicants for goods, services, or privileges provided, (2) operating grants and contributions, and ' (3) capital grants and contributions, including special assessments. ' ' ' ' (27) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING (CONTINUED) ' Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and � producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenue of the City's enterprise fund is charges to customers for sales and services. Operating expenses for enterprise funds include the , cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. , D. BUDGETS Budgets are adopted on a basis consistent with U.S. generally accepted accounting ' principles. Annual appropriated budgets are adopted for the General Fund. Budgeted expenditure appropriations lapse at year-end. � E. CASH AND INVESTMENTS Cash and investment balances from all funds are pooled and invested to the extent , available in investments authorized by Minnesota Statutes. Earnings from investments are allocated to individual funds on the basis of the fund's equity in the cash and investment pool. ' The City provides temporary advances to funds that have insufficient cash balances by means of an advance from another fund shown as interfund receivables in the ' advancing fund in the governmental fund financial statements, and an interfund payable in the fund with the deficit, untii adequate resources are received. These interfund payables are eliminated for statement of net assets presentation. Investments are stated at fair value as of the balance sheet date. Interest earnings are ' accrued at the balance sheet date. For purposes of the statement of cash flows the Proprietary Fund considers ali highly , liquid investments with a maturity of three months or less when purchased to be cash equivalents. All of the cash and investments allocated to the proprietary fund types have ' original maturities of 90 days or less. Therefore, the entire balance in such fund types is considered cash equivalents. ' ' ' (28> ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED � ) ' F. PROPERTY TAX CREDITS Property taxes on homestead property (as defined by state statutes) are partially ' reduced by property tax credits. These credits are paid to the City by the State in lieu of taxes levied against homestead property. The State remits these credits through installments each year. These credits are recognized as revenue by the City at the time ' of collection. G. PROPERTY TAX REVENUE RECOGNITION ' The City Council annually adopts a tax levy and certifies it to the County in December (levy/assessment date) of each year for collection in the following year. The County is ' responsible for billing and collecting all property taxes for itself, the City, the local School District and other taxing authorities. Such taxes become a lien on January 1 and are recorded as receivables by the City at that date. Real property taxes are payabie (by property owners) on May 15 and October 15 of each calendar year. Personal ' property taxes are payable by taxpayers on February 28 and June 30 of each year. These taxes are collected by the County and remitted to the City on or before July 15 and December 15 of the same year. Delinquent collections for November and ' December are received the following January. The City has no ability to enforce payment of property taxes by property owners. The County possesses this authority. ' Within the governmental fund financial statements, the City recognizes property tax revenue when it becomes both measurable and available to finance expenditures of the current period. In practice, current and delinquent taxes and State credits received by ' the City in July, December and the following January are recognized as revenue for the current year. Taxes and credits not received at the year-end are classified as delinquent and due from County taxes receivable. The portion of delinquent taxes not collected by , the City in January is fully offset by deferred revenue because it is not available to finance current expenditures. Deferred revenue in governmental activities is susceptible to full accrual on the government-wide statements. ' The City's property tax revenue includes payments from the Metropolitan Revenue Distribution (Fiscal Disparities Formula) per Minnesota Statute 473F. This statute provides a means of spreading a portion of the taxable valuation of ' commercial/industrial real property to various taxing authorities within the defined metropolitan area. The valuation "shared" is a portion of commercial/industrial property valuation growth since 1971. Property taxes paid to the City through this formula for , 2011 totaled $116,349. Receipt of property taxes from this "fiscal disparities pool" does not increase or decrease total tax revenue. 1 ' ' (29) CITY OF SCANDIA MINNESOTA ' , NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SPECIAL ASSESSMENT REVENUE RECOGNITION ' Special assessments are levied against benefited properties for the cost or a portion of the cost of special assessment improvement projects in accordance with state statutes. ' These assessments are collectible by the City over a term of years usually consistent with the term of the related bond issue. Collection of annual installments (including interest) is handled by the County Auditor in the same manner as property taxes. ' Property owners are allowed to (and often do) prepay future installments without interest or prepayment penalties. Within the fund financial statements, the revenue from special assessments is ' recognized by the City when it becomes measurable and available to finance expenditures of the current fiscal period. In practice, current and delinquent special assessments received by the City are recognized as revenue for the current year. ' Special assessments are collected by the County and remitted by December 31 (remitted to the City the following January) and are also recognized as revenue for the current year. All remaining delinquent and deferred special assessments receivable in , governmental funding are completely offset by deferred revenues. Deferred revenue in governmental activities is susceptible to full accrual on the government-wide statements. , Once a special assessment roll is adopted, the amount attributed to each parcel is a lien upon that property until full payment is made or the amount is determined to be ' excessive by the City Council or court action. If special assessments are allowed to go delinquent, the property is subject to tax forfeit sale and the first proceeds of that sale (after costs, penalties and expenses of sale) are remitted to the City in payment of delinquent special assessments. Generally, the City will collect the full amount of its ' special assessments not adjusted by the City Council or court action. Pursuant to state statutes, a property shall be subject to a tax forfeit sale after three years unless it is homesteaded, agricultural or seasonal recreational land in which event the property is ' subject to such sale after five years. I. CAPITAL ASSETS ' Capital assets, which include property, plant, equipment, and infrastructure assets (e.g. roads, sidewalks, street lights, and similar items) are reported in the applicable governmental or business-type activities columns in the government-wide financial , statements. Capital assets exceeding the City's capitalization threshold of $5,000 are recorded at historical cost or estimated historical cost if purchased or constructed. The cost of normal maintenance and repairs that do not add to the value of the asset or , materially extend asset lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Infrastructure has been capitalized as of 1980 and thereafter. ' ' (30) , ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ' I. CAPITAL ASSETS (CONTINUED) Depreciation on exhaustible assets is recorded as an allocated expense in the ' statement of activities with accumulated depreciation reflected in the statement of net assets. Capital assets are depreciated using the straight-line method over their estimated useful lives. Since surplus assets are sold for an immaterial amount when ' declared as no longer needed for City purposes, no salvage value is taken into consideration for depreciation purposes. Useful lives vary from 3 to 30 years for buildings, equipment, vehicles, furniture and fixtures, and other improvements, and 25 ' to 50 years for Infrastructure. Capital assets not being depreciated include land and construction in progress. ' J. COMPENSATED ABSENCES It is the City's policy to permit employees to accumulate earned but unused leave , benefits. All leave pay is accrued on a per pay period basis and recorded in the government-wide financial statements. The current portion is calculated based on historical trends. ' K. LONG-TERM OBLIGATIONS In the entity-wide financial statements, long-term debt and other long-term obligations ' are reported as liabilities in the applicable governmental activities. Bond premiums and discounts are deferred and amortized over the life of the bonds using the straight-line method. Bond issue costs, if material, are reported as deferred charges and amortized ' over the term of the related debt using the straight-line method. In the governmental fund financial statements, bond premiums and discounts, as well ' as bond issue costs are recognized during the current period. The face amount of the debt issue is reported as another financing source. Premiums received on debt issuances are reported as other financing sources while discounts are reported as other financing uses. Issue costs are reported as debt service expenditures. ' ' ' ' ' ' (31) CITY OF SCANDIA, MINNESOTA � NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' ' NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. FUND BALANCE , At December 31, 2011, the City adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. ' In the fund financial statements, governmental funds report fund balances in classifications that disclose constraints for which amounts in those funds can be spent. ' These classifications are as follows: Nonspendable — portions of fund balance related to prepaids, inventories, long-term receivables, and corpus on any permanent fund. ' Restricted — funds are constrained from outside parties (statute, grantors, bond agreements, etc). ' Committed — fund constraints are established and modified by a resolution approved by the City Council. ' Assigned — consists of internally imposed constraints approved by the City Council. Unassigned — is the residual classification for the General Fund and also reflects ' negative residual amounts in other funds. When an expenditure is incurred for purposes for which both restricted and unrestricted ' fund balance is available, it is the City's policy to use restricted first, then unrestricted fund balance. When an expenditure is incurred for purposes for which committed, assigned, and ' unassigned amounts are available, it is the City's policy to use committed first, then assigned, and finally unassigned amounts. The City formally adopted a fund balance policy for the General Fund. The policy , establishes a year-end target fund balance range of 35°/o - 50% of the annual operating budget. , , , , , �32� ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' N TE 1 M T P LI IE CONTINUED O SU MARY OF SIGNIFICANT ACCOUN ING O C S ( ) ' M. INTERFUND TRANSACTIONS Interfund services provided and used are accounted for as revenues, expenditures or ' expenses. Transactions that constitute reimbursements to a fund for expenditures/expenses initially made from it that are properly applicable to another fund, are recorded as expenditures/expenses in the reimbursing fund and as reductions ' of expenditures or expenses in the fund that is reimbursed. All other interfund transactions are reported as transfers. ' All interfund transactions are eliminated except for activity between governmental activities and business-type activities for presentation in the entity-wide statements of net assets and statements of activities. ' NOTE 2 DEPOSITS AND INVESTMENTS ' A. DEPOSITS The City maintains a cash and investment pool that is available for use by all funds. ' Each fund type's portion of this pool is displayed on the statement of net assets and the balance sheet as "Cash and Investments." In accordance with Minnesota Statutes the City maintains deposits at financial institutions which are authorized by the City Council. ' Custodial Credit Risk— Custodial credit risk for deposits is the risk that in the event of a bank failure, the City's deposits may not be returned to it. The City does not have a deposit policy for custodial credit risk and follows Minnesota Statutes for deposits. ' Minnesota Statutes require that all deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or corporate surety bonds. Authorized collateral include: U.S. ' government treasury bills, notes, or bonds; issues of a U.S. government agency; general obligations of a state or local government rated "A" or better; revenue obligations of a state or local government rated "AA" or better; irrevocable standby ' letters of credit issued by a Federal Home Loan Bank; and time deposits insured by a federal agency. Minnesota Statutes require securities pledged as collateral be held in safekeeping in a restricted account at the Federal Reserve Bank or in an account at a ' trust department of a commercial bank or other financial institution not owned or controlled by the depository. The carrying value and bank balance of the City's deposits in banks at December 31, ' 2011 is $2,689,452 and $2,777,227, respectively, and were entirely covered by federal depository insurance or by surety bonds and collateral in accordance with Minnesota Statutes. ' ' ' (33) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' , NOTE 3 CAPITAL ASSETS Capital asset activity for the year ended December 31, 2011 was as follows: ' Beginning Ending Balance Additions Disposals Balance ' Governmental Activities: Capital Assets Not Being Depreciated: Land $ 487,735 $ - $ - $ 487,735 Construction in Progress 39,295 111,852 (39,295) 111,852 ' Total Capital Assets Not Being Depreciated 527,030 111,852 (39,295) 599,587 Capital Assets Being Depreciated: Buildings 2,193,375 39,295 - 2,232,670 ' Equipment 351,613 13,809 - 365,422 Vehicles 983,128 23,167 - 1,006,295 Infrastructure 9,353,763 5,479 - 9,359,242 Other Improvements 162,647 - - 162,647 ' Total Capital Assets,Being Depreciated 13,044,526 81,750 - 13,126,276 Accumulated Depreciation for: Buildings (664,323) (48,261) - (712,584) ' Equipment (194,519) (31,046) - (225,565) Vehicles (523,948) (52,730) - (576,678) Infrastructure (2,497,083) (237,794) - (2,734,877) Other Improvements (67,776) (7,237) - (75,013) ' Total Accumulated Depreciation (3,947,649) (377,068) - (4,324,717) Total Capital Assets, Being Depreciated, Net 9,096,877 (295,318) - 8,801,559 Governmental Activities Capital Assets, Net $ 9,623,907 $ (183,466) $ (39,295) $ 9,401,146 Business-Type Activities: ' Sewer: Capital Assets Being Depreciated: ' Plant $ 1,500,000 $ - $ - $ 1,500,000 Less:Accumulated Depreciation (630,000) (30,000) - (660,000) Net Capital Assets-Sewer Utility $ 870,000 $ (30,000) $ - $ 840,000 , Depreciation was charged to City functions as follows: General Government $ 15,759 ' Public Safety 48,495 Public Works 300,573 ' Parks and Recreation 12,241 Total Depreciation-Governmental Activities $ 377,068 ' , ' (34) ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 4 CITY INDEBTEDNESS ' City indebtedness at December 31, 2011 is composed of the following: Final ' Issue Maturity Interest Original Balance Date Date Rate Issue 12/31/11 Governmental Activities: General Obligation Debt: , 2005 Building Crossover Bonds 5/1/2005 12/1/2015 3.35-4.2% $ 685,000 $ 415,000 2007 Improvement Bonds 5/1/2007 12/1/2017 3.65-4.1% 1,430,000 775,000 2010 Equipment Certificate 7/15/2010 2/1/2016 2.22-3.55% 200,000 200,000 2011 Equipment Certificate 6/30/2011 12/1/2016 2.75%-3.95% 150,000 150,000 , Total Long-Term Debt 2,465,000 1,540,000 Unamortized Bond Discount (43,090) (23,308) Compensated Absences N/A 19,090 Total 2,421,910 1,535,782 ' The following is a schedule of changes in City indebtedness for the year ended December 31, 2011: ' Amounts Balance Balance Due Within 1/1/11 Issued Retired 12/31/11 One Year ' Long-Term Debt Governmental Activities: General Obligation Notes $1,620,000 $ 150,000 $ (230,000) $ 1,540,000 $ 305,000 ' Unamortized Bond Discount (27,553) - 4,245 (23,308) - Compensated Absences 17,039 30,812 (28,761) 19,090 14,035 Total Long-Term Debt $1,609,486 $ 180,812 $ (254,516) $ 1,535,782 $ 319,035 ' All long-term bonded indebtedness outstanding at December 31, 2011 is backed by the full faith and credit of the City, including special assessment bond issues. For the governmental ' activities, compensated absences are generally liquidated by the General Fund. During 2005, the City issued $685,000 of General Obligation Building Crossover Refunding Bonds, Series 2005A for the purpose of refunding the $1,200,000 General Obligation ' Building Bonds of 2000. The crossover refunding occurred on December 1, 2008. , ' 1 ' ' (35) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 , ' NOTE 4 CITY INDEBTEDNESS (CONTINUED) Minimum annual principal and interest payments required to retire long-term debt, not ' including compensated absences payable are as follows: Year Endinq December 31, Principal Interest Total ' 2012 305,000 � 57,950 362,950 2013 305,000 47,134 352,134 2014 305,000 35,943 340,943 ' 2015 305,000 24,198 329,198 2016 195,000 12,083 207,083 2017 125,OOC 5,125 130,125 ' Total 1,540,000 182,433 1,722,433 Description and Restrictions of Lonq-Term Debt ' General Obligation Bonds — The bonds were issued for improvements or projects which benefited the City as a whole and are, therefore, repaid from ad valorem levies. The liability for compensated absences represents vested benefits earned by governmental ' fund employees through the end of the year which will be paid or used in future periods. NOTE 5 DEFINED BENEFIT PENSION PLANS —STATEWIDE I A. PLAN DESCRIPTION ' All full-time and certain part-time employees of the City are covered by defined benefit pension plans administered by the Public Employees Retirement Association of ' Minnesota (PERA). PERA administers the General Employees Retirement Fund (GERF), which is a cost-sharing, multiple-employer retirement plan. This plan is established and administered in accordance with Minnesota Statutes, Chapter 353 and 356. ' GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new ' members must participate in the Coordinated Plan. PERA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by state ' statute, and vest after three years of credited service. The defined retirement benefits are based on a member's highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. ' 1 , (36) , ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' — T EWIDE CONTINUED NOTE 5 DEFINED BENEFIT PENSION PLANS S AT ( ) ' B. PLAN DESCRIPTION (CONTINUED) Two methods are used to compute benefits for PERA's Coordinated and Basic Plan ' members. The retiring member receives the higher of a step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2% of average salary for each of the first 10 ' years of service and 2.7°/o for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2% of average salary for each of the first 10 years and 1.7% for each remaining year. Under Method 2, the annuity accrual rate is 2.7% of � average salary for Basic Plan members and 1.7% for Coordinated Plan members for each year of service. , For GERF members hired prior to July 1, 1989 whose annuity is calculated using Method 1, a full annuity is availabfe when age plus years of service equal 90. Normal retirement age is 65 for Basic and Coordinated members hired prior to July 1, 1989. Normal retirement age is the age for unreduced Social Security benefits capped at 66 , for Coordinated members hired on or after July 1, 1989. A reduced retirement annuity is also available to eligible members seeking early retirement. ' There are different types of annuities available to members upon retirement. A single- life annuity is a lifetime annuity that ceases upon the death of the retiree, no survivor annuity is payable. There are also various types of joint and survivor annuity options ' available which will be payable over joint lives. Members may also leave their contributions in the fund upon termination of public service in order to qualify for a deferred annuity at retirement age. Refunds of contributions are availab�e at any time to ' members who leave public service, but before retirement benefits begin. The benefit provisions stated in the previous paragraphs of this section are current ' provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. ' PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF. That report may be obtained on the internet at www.mnpera.org, by writing to PERA at 60 Empire Drive #200, St. Paul, ' Minnesota, 55103-2088 or by calling (651) 296-7460 or 1-800-652-9026. ' ' ' t (37) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' ' NOTE 5 DEFINED BENEFIT PENSION PLANS — STATEWIDE (CONTINUED) C. FUNDING POLICY ' Minnesota Statutes, Chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the state legisiature. The ' City makes annual contributions to the pension plans equal to the amount required by state statutes. GERF Basic Plan members and Coordinated Plan members were required to contribute 9.1% and 6.25% respectively, of their annual covered salary in ' 2011. The City is required to contribute the following percentages of annual covered payroll: 11.78°/o for Basic Plan members and 7.25% for Coordinated Plan members. The City's contributions to the General Employees Retirement Fund for the years ended , December 31, 2011, 2010, and 2009 were $21,169, $20,298, and $19,880, respectively. The City's contributions were equal to the contractually required contributions for each year as set by state statute. ' NOTE 6 DEFINED CONTRIBUTION PENSION PLAN ' The council members of the City are covered by the Public Employees Defined Contribution Plan (PEDCP), a multiple-employer deferred compensation pian administered by the Public Employees Retirement Association of Minnesota (PERA). The PEDCP is a tax qualified , plan under Section 401(a) of the Internal Revenue Code and all contributions by or on behalf of employees are tax deferred until time of withdrawal. Plan benefits depend solely on amounts contributed to the plan plus investment earnings, ' less administrative expenses. Minnesota Statutes, Chapter 353D.03, specifies plan provisions, including the employee and employer contribution rates for those qualified ' personnel who elect to participate. An eligible elected official who decides to participate contributes 5% of salary which is matched by the elected official's employer. Employer and Employee contributions are combined and used to purchase shares in one or more of the ' seven accounts of the Minnesota Supplemental Investment Fund. For administering the plan, PERA receives 2% of employer contributions and twenty-five hundredths of one percent of the assets in each member's account annually. Total employer and employee contributions made by the City during fiscal year 2011 were ' $3,006. ' ' ' , (38) ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 7 STATEWIDE VOLUNTEER FIREFIGHTER RETIREMENT PLAN � A. PLAN DESCRIPTION Beginning January 1, 2011, the City joined the Voluntary Statewide Volunteer ' Firefighter Retirement Plan (the Plan) administered by the Public Employees Retirement Association (PERA). The plan is an agent lump-sum defined benefit plan. Plan assets are managed by the Minnesota State Board of Investment. The Plan is ' voluntary and open to fire departments as a replacement of their existing volunteer firefighter retirement plan. It is also open to municipalities currently without a volunteer firefighter retirement plan. The Plan is codified as Minnesota Statutes Chapter 353G. ' The lump sum benefits payable from the Plan are funded by existing fire state aid allocated to a municipality, additional municipal contributions, as applicable, and , earnings on the investment of these funds. Each participating entity wili have a separate Entity Account in which the assets necessary to fund the benefits will be maintained. , PERA perForms annual calculations for each Entity Account to assess the level of funding needed to maintain assets sufficient to pay the benefits being earned by the participating entity's volunteer firefighters. The calculations will resemble the procedure already defined in law for use by ali existing volunteer fire relief associations. Required ' contributions for the coming year will be based on service credit data provided to PERA in March of each year by each participating entity's fire chief. There are no provisions that allow voluntary contributions into the Plan at this time, either from members or from tmunicipalities. B. RETIREMENT BENEFITS ' The Plan provides for the payment of lump sum retirement benefits that are based on a specific dollar value paid for each year of credited service accumulated by a volunteer , firefighter who terminates service and meets the minimum requirements for receipt of the benefits. The dollar value payable per year of service is determined by the sponsoring municipality or entity at the time an election to participate in the Plan is made, selected from 20 possible benefit levels. An entity may elect to increase the ' benefit level after joining the Plan. The benefit level approved by the City is $2,500 per year of service. ' To be eligible for a benefit, a firefighter must: • be at least 50 years old; • be vested, which means having acquired a minimum of 5 years of "good-time" ' service credit in the Plan; and, • have severed his or her employment relationship with the fire department for a minimum of 30 days. , ' ' (39) CITY OF SCANDIA, MINNESOTA ' NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2011 ' , NOTE 7 STATEWIDE VOLUNTEER FIREFIGHTER RETIREMENT PLAN (CONTINUED) B. RETIREMENT BENEFITS (CONTINUED) � A full retirement benefit is payable to a firefighter with 20 years of service. Firefighters retiring with fewer than 20 but at least 5 years of service are eligible for a percentage of t a full benefit. Former members of the fire department who were vested at the time they left the department are also entitled to benefits when they attain age 50. Total employer contributions made during fiscal year 2011 were as follows: ' City Contributions $ 58,260 ' State Aid 21,763 Total $ 80,023 Prior to 2011, the firefighter pension benefits were held and managed by the Scandia ' Fire Relief Association. Upon joining the Plan, the pension trust fund of the Scandia Fire Relief Association ceased to exist as a pension fund and the legal title to the assets ' were contributed the Plan in the amount of$577,244. NOTE 8 COMMITMENTS AND CONTINGENCIES ' Law Enforcement Services — The City has entered into an agreement with Washington ' County to receive law enforcement services for 2011 and 2012. The agreement calls for the City to pay Washington County based on the actual costs associated with providing services under the agreement. Related expenditures for fiscal year 2011 were $112,267. Law enforcement services for 2012 are estimated to cost approximately $117,000. ' Fire Department Services Aqreement— Effective January 1, 2012, the City has extended its agreement with May Township to provide fire services to the Township. The contract is for ' three years extending through December 31, 2014. If the contract is not renewed or extended by December 31, 2014, the contract will continue on a prorated month-to-month basis. Related revenues for the fiscal years 2011 and 2010 were $32,574 and $30,876, ' respectively. The Township will pay the City $33,551 for 2012. ' ' ' ' (40) ' ' CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS ' DECEMBER 31, 2011 ' NOTE 9 INTERFUND TRANSFERS ' Individual fund transfers for fiscal year 2011 are as follows: Transfer Transfer ' In Out Governmental Activity: General Fund $ 3,645 $ 110,000 ' Non-Major Funds: - Equipment Replacement 110,000 Business-Type Activity: ' Sewer - 3,645 $ 113,645 $ 113,645 ' During 2011, the City made routine interfund transfers to allocate financial resources as approved in the budget. ' NOTE 10 RISK MANAGEMENT , The City is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City has entered into a joint powers agreement with the League of Minnesota Cities ' Insurance Trust (LMCIT) to protect the City in the event of a loss. The LMCIT is a public entity risk pool currently operating as a common risk management and insurance program for Minnesota cities. The agreement for formation of the LMCIT provides that the pool will ' be self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of reserved amounts for each insured event. The pool can make additional assessments to make the pool self—sustaining. The City has determined ' that it is not possible to estimate the amount of such additional assessments, if any; however, they are not expected to be material to these financial statements. There have been no significant reductions in insurance coverage during 2011 and settlements have not ' exceeded insurance coverage for any of the past three fiscal years. The City has entered into a joint powers agreement with the Southwest/West Central Services Cooperative (SC) to provide group employee benefits for their employees and to ' obtain other financial and risk management services. The SC is a public entity which operates the health insurance pool through which the City purchases employee health insurance. The joint powers agreement provides that the SC will establish, procure, and ' administer group employee benefits, including selecting providers, in exchange for a service fee determined by the City's contract. The agreement is renewed annually and the City may withdraw from the agreement at any time during the year upon ninety days written ' notice to the Board and all providers of the program. ' ' (41) ' ' ' ' ' ' REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON INFORMATION ' ' ' ' ' ' ' ' ' ' ' , ' CITY OF SCANDIA, MINNESOTA , SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL , GENERALFUND YEAR ENDED DECEMBER 31, 2011 ' Budgeted Amounts ' Actual Variance with Original Final Amounts Final Budget REVENUES ' PropertyTaxes $ 1,563,940 $ 1,563,940 $ 1,559,659 $ (4,281) Intergovernmental: ' State Aid Credits 11,612 11,612 42,523 30,911 Recycling Grant 7,235 7,235 7,235 Other Grants 12,800 12,800 13,234 434 Total Intergovernmental Revenues 31,647 31,647 62,992 31,345 ' Licenses and Permits 47,885 47,885 63,092 15,207 Fines and Forfeits 15,000 15,000 19,110 4,110 ' Charges for Services: Zoning and Hearing Fees 260,987 260,987 210,355 (50,632) Fire Protection 32,574 32,574 32,574 - ' Cable Franchise 6,000 6,000 7,266 1,266 Total Charges for Services 299,561 299,561 250,195 (49,366) Miscellaneous: ' Interest 11,537 11,537 9,684 (1,853) Donations and Other 4,175 8,458 12,500 4,042 Total Miscellaneous 15,712 19,995 22,184 2,189 ' Total Revenues 1,973,745 1,978,028 1,977,232 (796) EXPENDITURES , General Government: Administration and Finance 345,900 345,900 317,388 (28,512) City Council 20,289 20,289 20,000 (289) Elections 470 470 470 - , Planning and Building 331,400 331,400 334,504 3,104 CapitalOutlay 2,500 2,500 1,563 (937) Total General Government 700,559 700,559 673,925 (26,634) , Public Safety: Police 121,574 123,307 114,119 (9,188) Fire 285,500 285,500 263,059 (22,441) ' CapitalOutlay 2,000 4,583 930 (3,653) Total Public Safety 409,074 413,390 378,108 (35,282) ' , ' �42� ' ' CITY OF SCANDIA, MINNESOTA SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE ' BUDGET AND ACTUAL (CONTINUED) GENERALFUND YEAR ENDED DECEMBER 31, 2011 , ' Budgeted Amounts Actual Variance with Original Final Amounts Final Budget ' EXPENDITURES (CONTINUED) Pubiic Works: Public Works $ 621,911 $ 613,546 $ 526,908 $ (86,638) , Uptown Sewer 23,042 23,042 21,418 (1,624) Total Public Works 644,953 636,588 548,326 (88,262) ' Parks and Recreation: Parks 49,903 52,127 54,401 2,274 Community Center 62,142 53,777 61,094 7,317 Total Parks and Recreation 112,045 105,904 115,495 9,591 ' Total Expenditures 1,866,631 1,856,441 1,715,854 (140,587) ' Revenues in Excess of Expenditures 107,114 121,587 261,378 139,791 OTHER FINANCING SOURCES (USES) Transfers In 3,787 3,787 3,645 (142) ' Transfers Out (110,000) (110,000) (110,000) - Total Other Financing Sources(Uses) (106,213) (106,213) (106,355) (142) ' NET CHANGE IN FUND BALANCE $ 901 $ 15,374 155,023 $ 139,649 Fund Balance-Beginning of Year 1,098,653 , FUND BALANCE-END OF YEAR $ 1,253,676 , � ' ' ' ' ' (43) CITY OF SCANDIA, MINNESOTA ' NOTES TO REQUIRED SUPPLEMENTARY INFORMATION YEAR ENDED DECEMBER 31, 2011 ' , STEWARDSHIP COMPLIANCE AND ACCOUNTABILITY - BUDGETS The General Fund budget is legally adopted on a basis consistent with U.S. generally accepted ' accounting principles. Actual expenditures exceeded budgets during 2011 as follows: Final ' Budget Actual Excess General Fund Parks and Recreation: ' Parks $ 52,127 $ 54,401 $ (2,274) Community Center 53,777 61,094 (7,317) ' ' , , ' ' ' � ' ' ' ' (44) ' ' , ' ' ' ' COMBINING FUND FINANCIAL STATEMENTS , ' ' ' ' ' , ' ' ' ' ' ' ' CITY OF SCANDIA, MINNESOTA COMBINING BALANCE SHEET , NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2011 ' ' Debt Service Capital Projects 2000 Park Total Fire Hall Equipment Capital Capital Nonmajor Bond Fund Certificates Improvement Improvement Funds ' ASSETS Cash and Investments $ 178,468 $ 43,018 $ 227,405 $ 12,936 $ 461,827 Taxes Receivable 23 - 7 - 30 ' Total Assets $ 178,491 $ 43,018 $ 227,412 $ 12,936 $ 461,857 LIABILITIES AND FUND BALANCES ' LIABILITIES Deferred Revenue $ 23 $ $ 7 $ $ 30 ' FUND BALANCES Restricted for Debt Service 178,468 43,018 221,486 Assigned for: Infrastructure Improvement Projects - - 227,405 - 227,405 ' Acquisition and Development of Parks - - - 12,936 12,936 Total Fund Balance 178,468 43,018 227,405 12,936 461,827 Total Liabilities and Fund Balances $ 178,491 $ 43,018 $ 227,412 $ 12,936 $ 461,857 , ' ' ' ' ' ' ' ' ' (45) CITY OF SCANDIA MINNESOTA ' � COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE ' NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2011 , Debt Service Capital Projects ' 2000 Park Total Fire Hall Equipment Capital Capital Nonmajor Bond Fund Certificates Improvement Improvement Funds ' REVENUES Taxes $ 120,900 $ 51,484 $ 38,500 $ - $ 210,884 Miscellaneous Revenues 1,089 134 1,353 88 2,664 Total Revenues 121,989 51,618 39,853 3,088 216,548 ' EXPENDITURES Current: General Government - 2,500 - - 2,500 , Parks and Recreation Center - - - 5,479 5,479 Debt Service: Principal Payments 95,000 - - - 95,000 , Interest Payments 20,142 6,100 - - 26,242 CapitalOutlay - - 546 - 546 Total Expenditures 115,142 8,600 546 5,479 129,767 EXCESS(DEFICIENCY)OF REVENUES , OVER EXPENDITURES 6,847 43,018 39,307 (2,391) 86,781 Fund Balance-Beginning of Year 171,621 - 188,098 15,327 375,046 , FUND BALANCE-END OF YEAR $ 178,468 $ 43,018 $ 227,405 $ 12,936 $ 461,827 ' ' ' , ' ' , , (46) ' ' CITY OF SCANDIA, MINNESOTA STATEMENT OF CHANGES IN ASSETS AND LIABILITIES - FIDUCIARY FUND ' YEAR ENDED DECEMBER 31, 2011 , Balance Balance ' January 1, December31, 2011 Additions Deductions 2011 ASSETS CURRENT ASSETS ' Cash and Investments $ 54,245 $ 229,493 $ 165,950 $ 117,788 , LIABILITIES CURRENT LIABILITIES Contractor Deposits $ 54,245 $ 229,493 $ 165,950 $ 117,788 ' ' ' � ' ' ' ' ' ' ' ' ' (47) ' ' , ' ' ' III. ' OTHER REQUIRED REPORTS ' ' ' ' ' ' ' , ' ' ' ' ' � . CliftonLarsonAllen LLP ' � www.cliftonlarsonallen.com CliftonLarsonAllen � � , REPORT ON MINNESOTA LEGAL COMPLIANCE ' Honorable Mayor Members of the City Council and Citizens City of Scandia, Minnesota ' 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 of Scandia, Minnesota (the City) which collectively comprise the City's basic financial statements as of and for the year ended December 31, 2011, and have issued our report thereon dated Aprii 6, 2012. ' We conducted our audit in accordance with U.S. generaliy accepted auditing standards and the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions, promulgated by the State Auditor pursuant to Minn. Stat. §6.65. Accordingly, the audit included such tests of the ' accounting records and such other auditing procedures as we considered necessary in the circumstances. ' The Minnesota Legal Compliance Audit Guide for Political Subdivisions covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous City provisions, and tax increment , financing districts. Our study included all of the listed categories except for tax increment financing districts because the City has no tax increment financing districts. ' The results of our tests indicate that, with respect to the items tested, the City of Scandia, Minnesota complied with the material terms and conditions of applicable legal provisions. t This report is intended solely for the information and use of management, the City Council, the Office of the Minnesota State Auditor, and other state agencies, and is not intended to be and should not be used by anyone other than these specified parties. , LL� ' CliftonLarsonAllen LLP Minneapolis, Minnesota ' April 6, 2012 ' ' (48) ' � . ClfftonLarsonAllen LLP � �v�v�v.ciiftonlarsonallen.com ' CliftonLarsonAtlen � REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING ' AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN , ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS ' Honorable Mayor and Members of the City Council ' City of Scandia, Minnesota 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 of Scandia, Minnesota (the City) as of and for the year ended December 31, 2011, which collectively comprise the City's basic financial statements and have issued our report thereon dated April 6, 2012. We conducted our audit in � accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. ' Internal Control Over Financial Reporting In planning and performing our audit, we considered the City's internal control over financial reporting ' as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. ' Our consideration of the internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over ' financial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as described below, we identified certain deficiencies in internai control over ' financial reporting that we consider to be material weaknesses. A deficiency in internal control exists when the design or operation of a control does not allow , management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected on a ' timely basis. We consider the deficiencies described below to be material weaknesses. ' ' (49) ' ' Honorable Mayor and Members of the City Council ' ' Limited Seqreqation of Duties Condition: Due to the City's limited number of office personnel, segregation of the accounting ' functions that is necessary to ensure adequate internal accounting control may not be possible. This is not unusual in an operation the size of the City; however, the City Council should constantly be aware of this condition and realize that the concentration of duties and responsibilities in a limited number of � individuals is not desirable from an accounting point of view. Criteria: Generally, a system of internal control contemplates separation of duties such that no individual has responsibility to execute a transaction, have physical access to the related assets, and ' have responsibility or authority to record the transaction. Effect: The City is unable to maintain segregation of incompatible duties. ' Cause: Limited number of personnel involved in the finance office. Recommendation: This area should be reviewed periodically and consideration given to improving the , segregation of duties. In making this review, it is most important to consider the benefit derived as weighed against the cost of the improvements. Management feels it is currently not economically feasible for the City to hire additional staff in order to adequately segregate all incompatible duties. ' Therefore, the City Council needs to be sufficiently involved in the oversight process and controls and responsibilities should be reviewed periodically. ' Manaqement Response: Management has decided, due to the small size of the City's staff, that the additional costs of implementing the necessary controls outweigh the benefits that would be derived. , Material Audit Adiustments - Internal Control over the Financial Reportinq Process Condition: The audit firm proposed, and the City posted to its general ledger accounts, 20 journal ' entries to correct misstatements. These entries relate to internal controls over the year-end close-out process. The absence of a complete control procedure or process in this area is considered a material weakness because the potential exists that a material misstatement of the financial statements could , occur and not be prevented or detected by the City's internal control processes. Criteria: The City should have controls in place to prevent and detect a material misstatement in the financial statements in a timely manner. Management is responsible for the accuracy and ' completeness of all financial records and related information. Their responsibilities include adjusting the financial statements to correct material misstatements. ' Effect: Significant audit adjustments were required to bring the financial statements into accordance with U.S. generally accepted accounting principles (GAAP). Cause: The City has not established controls to ensure that all accounts are adjusted to their ' appropriate year-end balances in accordance with GAAP. Recommendation: We recommend the City continue to evaluate its internal control processes to ' determine if additional internal control procedures should be implemented to ensure that accounts are adjusted to their appropriate year-end balances in accordance with GAAP. ' ' (50) Honorable Ma or and ' Y Members of the City Council ' Manaqement Response: ' The amount of journal entries related to the year-end close-out process is reasonable for a city of our size. The City relies on the audit firm to assist in adjusting accounts to their appropriate year-end ' balances in accordance with GAAP as well as prepare the annual financial statements. Management has decided this is necessary due to the small size of the city staff, its level of expertise and assigned duties. The additional cost of bringing in more staff outweighs the benefits that would be derived. , Oversiqht of the Financial Reportinq Process Condition: The City does not have an internal control policy in place over annual financial reporting ' under GAAP, therefore, the potential exists that a material misstatement of the annual financial statements could occur and not be prevented or detected by the City's internal controls. Criteria: The City must be able to prevent or detect a material misstatement in the annual financial ' statements, including footnote disclosures. Effect: Departures from accounting principles generally accepted in the United States of America ' would not necessarily be detected by management. Cause: The City relies on the audit firm to prepare the annual financial statements and related footnote disclosures. However, they have reviewed and approved the annual financial statements and related ' footnote disclosures. Recommendation: The City should continue to evaluate their internal staff, expertise, and assigned ' duties to determine if an internal control policy over the annual financial reporting is beneficial. Manaqement Response: � The City's internal staff does not have the resources to provide internal control over the annual financial reporting under GAAP. However, annual financial statements are closely reviewed and discussed with the audit firm. The City relies on the audit firm to prepare annual financial statements. The additional cost of providing internal annual financial reporting outweighs the benefits that would be derived. ' Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of ' material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on ' compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. ' We noted certain matters that we reported to the management of the City of Scandia in a separate letter dated April 6, 2012. ' The City's written responses to the findings identified in our audit have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. ' ' (51) ' ' Honorable Mayor and Members of the City Council ' ' This report is intended solely for the information and use of the City Council, management, the Office of the Minnesota State Auditor, and state and federal awarding agencies and is not intended to be and ' should not be used by anyone other than these specified parties. , a���.LL� CliftonLarsonAllen LLP ' Minneapolis, Minnesota April 6, 2012 ' ' 1 ' ' ' ' ' � , ' ' ' (52)