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9.d) Part 1 - 2008 Audit and Financial Statements, LarsenAllen Meeting Date: 4/21/2009 Agenda Item: �� d� / City Council Agenda Report City of Scandia 14727 209`h St. North Scandia, MN 55073 (651) 433-2274 Action Requested: Accept the Auditors Report and Financial Statements for the year ended December 31, 2008 and direct publication of the summary financial statement as required by state law. Deadline/ Timeline: N/A Background: Representatives of Larson Allen will be present at the Apri121 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/ • SAS 114 Letter for Year Ended December 31, 2008 Materials provided: . Management Letter for Year Ended December 31, 2008 • Financial Statements for Year Ended December 31, 2008 Contact(s): Craig Popenhagen, CPA LarsonAllen (612 397-3087) Prepared by: Anne Hurlburt, Administrator (audit 2008) Page 1 of 1 04/15/09 9 Lars�nAlleri LI.P CPAs, Consultancs & Advisors www.larsonallen.com Honorable Mayor and City Council City of Scandia Scandia,Minnesota In planning and performing our audit of the financial statements of City of Scandia for the year ended December 31, 2008, in accordance with auditing standards generally accepted in the United States of America,we considered the organization's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the organization's internal control. However, during our audit we became aware of certain matters that are opportunities for strengthening internal controls and operating efficiency. The memorandum that accompanies this letter summarizes our comments and suggestions regarding those matters. (We previously reported on the Organization's internal control in our report dated April 2, 2009.)This letter does not affect our report dated April 2, 2009, on the financial statements of City of Scandia. Disbursement Si�natures During testing, we noted the City requires three signatures on checks. Given the Council's review of disbursements and the detailed budget to actual analysis and reports to the Council, the City may be able to improve efficiency,without sacrificing oversight,by only requiring two signatures of approval. Fund Balance Reserves We would like to take this moment to discuss fund balance and long term planning. We recommend the City develop a plan to increase their fund balance reserves in order to meet the funding requirements of the 2008-2012 capital improvement plan and also be able to respond to any unforeseen circumstances that may arise (changes in funding, unexpected costs). Some items to consider in an attempt to increase your fund balance would be pursue additional funding sources, formulate a budget to increase fund balance and manage to that budget. Accountin�and Financial Reportin�for Easements The Governmental Accounting Standards Board(GASB) issued Statement No. 51, which is applicable to the City for the year ending December 31, 2010. The purpose of Statement No. 51 is to eliminate the inconsistencies in accounting and reporting between governmental entities related to intangible items such as easements, patents, trademarks, software, and donated assets. The area that GASB No. 51 will affect the City is in regards to easements. The City would only be required to record easements acquired in 2010 and thereafter, but has the option to retroactively record easements back to 1980. Other Postemplovment Benefits GASB issued Statement No. 45, which is applicable to the City for the year ending December 31, 2009. The purpose of Statement No. 45 is to measure, record and disclosure liabilities for other postemployment benefit obligations. The impact to the City will likely only be in regards to an "implicit rate subsidy" on insurance coverage that retirees have the option to continue. Generally, involvement of an actuary is necessary to estimate the liability for postemployment benefits. However, entities with less than 100 employees are permitted to estimate the liability using a simplified method as specified in GASB Statement No. 45. R I'y� ��,� = LarsonAllen LLP is a member of Nexia lnternational,a worlclwide network of independent accounting and consulting firms. tN'rsitNnT�orrnl. Honorable Mayor and City Council City of Scandia Page 2 Fund Balance ReportinE Chan�es In March 2009, Governmental Accounting Standards Board issued GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The requirements of this Statement are effective for the City's fiscal year ending December 31, 2011. Governments that wish to implement earlier than that date are encouraged to do so. Statement 54 distinguishes between fund balance amounts that are considered non-spendable, such as fund balance associated with inventories, and other amounts that are classified based on the relative ability to be spent. Beginning with the most non-spendable classification, fund balances will be reported in the following classifications: • Restricted—amounts constrained by external parties,constitutional provision, or enabling legislation. • Committed—includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority • Assigned—amounts a government intends to use for a particular purpose. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. • Unassigned—amounts that are not constrained at all will be reported in the general fund or to report deficit balances in other governmental funds. The new standard also clarifies the definitions of individual governmental fund types. The statement interprets certain terms within the definition of special revenue fund types, while further clarifying the debt service and capital projects fund type definitions. The statement also specifies how economic stabilization or "rainy-day" amounts should be reported as a component of fund balance in the general fund. No longer is it considered appropriate to categorize these types of funds as special-revenue funds. For financial reporting purposes, stabilization should be regarded as a "restricted" or "committed" classification only if the government details the circumstances or conditions that signal the need for stabilization in sufficient detail. Otherwise, these amounts should be reported as"unassigned" in the general fund. We look forward to answering the CounciPs and your staff's questions and concerns related to the new standards, accounting guidance, or issues that arise throughout the year that impact the City of Scandia. We will review the status of these comments during our next audit engagement. We have already discussed many of these comments and suggestions with various organization personnel, and we will be pleased to discuss them in further detail at your convenience, to perform any additional study of these matters, or to assist you in implementing the recommendations. L.G� LarsonAllen LLP Minneapolis, Minnesota Apri12, 2009 Lars�nAlleri LLP CPAs, Consultants & Advisors www.larsonallen.com C1�COUI]Cl� City of Scandia 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 for the year ended December 31, 2008, and have issued our report thereon dated April 2, 2009. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter dated November 12, 2008, 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 of Scandia. 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 of Scandia'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 Local Government, promulgated by the State Auditor pursuant Minnesota Statute 6.65. Other Information in Documents Containing Audited Financial Statements Our audit opinion, the audited financial statements, and the notes to financial statements should only be used in their entirety. Inclusion of the audited financial statements in a client prepared document, such as an annual report, should be done only with our prior approval and review of the document. Our responsibility for other information in documents containing the entity's financial statements and report does not extend beyond the financial information identified in the report. We do not have an obligation to perform any procedures to corroborate other information contained in such documents. Plaaned 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 January 8,2009. I��' � LarsonAllen LI.P is a member of Nexia lncemational,a worldwide necwork of independent accounting and consulting firms. �N��r:rzNn novni. � City Council City of Scandia Page 2 Significant Audit Findings Qualitative Aspects ojAccounting 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. The significant accounting policies used by City of Scandia are described in Note 1 to the financial statements. The application of existing policies was not changed during 2008, except that several special revenue funds were closed and their remaining fund balances were transferred to the general fund. No new accounting policies were adopted during 2008, except for Governmental Accounting Standards Board (GASB) Statement No. 49, Accountrng and Financial Reporting for Pollution Remediation Obligations. The adoption of GASB Statement No. 49 did not have a significant impact on the City's financial statements. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Estimated useful lives of Sewer Fund 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 the 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. Estimated current portion of compensated absences payable — Management's estimate of the amount of the year-end compensated absences payable balance to be taken by employees within one year of December 31, 2008 is based on historical trends and anticipated leave time activity. We evaluated the key factors 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 disclosures in the financial statements are neutral, consistent,and clear. Difficulties Encountered in Perjorming the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Recorded and Unrecorded Adjustments Professional standards require us to accumulate all known and likely adjustments identified during the audit,other than those that are trivial, and communicate them to the appropriate level of management. The uncorrected misstatements of the financial statements are summarized below. Management has determined that effect of the entry is not material, both individually and in the aggregate,to the financial statements taken as a whole. Certain issuance costs and discounts related to a 2005 bond issue were expensed at the time the bonds were issued, instead of being recorded on the statement of net assets. The effect of recording these costs in 2008 understated interest and fiscal charges expense by$14,235. City Council City of Scandia Page 3 In addition, 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, equity, revenues and expenditures. These audit adjustments were posted by management. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the 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 Apri12,2009. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the City's financial statements or a determination of the type of 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. * * * * * * 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. �� LarsonAllen LLP Minneapolis, Minnesota April 2, 2009 i 1 1 1 ' CITY OF SCANDIA, MINNESOTA FINANCIAL STATEMENTS AND , SUPPLEMENTARY INFORMATION YEAR ENDED DECEMBER 31, 2008 ' ' ' City of Scandia 14727 209�' Street North ' Scandia, Minnesota 55073 ' ' ' ' ' ' ' ' ' i 1 1 1 1 1 1 1 1 1 1 1 1 1 1 i 1 1 1 ' CITY OF SCANDIA MINNESOTA � , TABLE OF CONTENTS YEAR ENDED DECEMBER 31, 2008 ' I. INTRODUCTORY SECTION , Elected and Appointed Officials 11. FINANCIAL SECTION ' Independent Auditors' Report � Requi�ed Supplementary Information , ManagemenYs Discussion and Analysis 3 Basic Financial Statements ' Statement of Net Assets 14 Statement of Activities 15 , Balance Sheet— Governmental Funds �7 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets— Governmental Activities 19 ' Statement of Revenues, Expenditures, and Changes in Fund Balance— Governmental Funds 20 , Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities— Governmental Activities 22 � Statement of Net Assets— Proprietary Funds 23 Statement of Revenues, Expenses, and Changes in Net Assets— Proprietary ' Funds 24 Statement of Cash Flows — Proprietary Funds 25 Statement of Net Assets— Fiduciary Fund 26 � Notes to Basic Financial Statements 27 Required Supplementary Information — Budgetary Comparison Information ' Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual — General Fund 43 ' Notes to Required Supplementary Information 45 Combining Fund Financial Statements ' Combining Balance Sheet— Nonmajor Governmental Funds 46 Combining Statement of Revenues, Expenditures and Changes in Fund Balance — Nonmajor Governmental Funds 4g � Statement of Changes in Assets and Liabilities — Fiduciary Funds 50 ' ' ' ' t ' , ' , ' , ' � , ' , , � � , , ' CITY OF SCANDIA, MiNNESOTA � TABLE OF CONTENTS (CONTINUED) YEAR ENDED DECEMBER 31, 2008 ' III. OTHER REQUIRED REPORTS ' Report on Minnesota Legai Compliance 51 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 52 ' , ' � i 1 1 1 1 1 1 1 1 1 , ' � , � ' 1 ' � ' � , ' ' ' ' � , � ' , ' � � ' I. � INTRODUCTORY SECTION ' � � � ' , ' � � � ' � ' � , � � , 1 1 � 1 1 1 1 1 i � � 1 � � CITY F C O S ANDIA, MINNESOTA � ELECTED AND APPOINTED OFFICIALS DECEMBER 31, 2008 ' ' ' Elected Position Dennis Seefeldt Mayor � Dolores Peterson Council Member Pete Crum Council Member , Michael Harnetty Council Member , Donnette Yehle Council Member Appointed � Colleen Firkus Treasurer Brenda Eklund Deputy Clerk � Anne Hurlburt Administrator , Steve Thorp Building Code Enforcement Official ' , ' � � � , ' � � ' , , � � ' , i i 1 1 i 1 1 ! 1 1 � ' ' ' ' ' II. ' FINANCIAL SECTION ' r i � � � � � i I 1 1 � � � ' � ' ' ' r i 1 1 1 1 1 i � � 1 � Lars�nAller� , LLP CPAs, Consulcants & Advisors www.larsonallen.cam � 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, 2008, which collectively comprise the City's basic financial statements as listed in the table 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. ' Except as discussed in the following paragraph, we conducted our audit in accordance with U.S. generally accepted auditing standards 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. , Because of the inadequacy of accounting records related to capital assets of governmental activities, we were unable to form an opinion regarding the amounts at which capital assets of governmental activities are recorded in the accompanying statement of net assets at December 31, 2008. ' Also, the City has not maintained detailed capital asset records and has not computed depreciation on governmental activity assets. All capital expenditures should be capitalized and depreciated over their � estimated useful lives to conform with accounting principles generally accepted in the United States of America. The effects on the financial statements of the preceding practices are not reasonably determinable. ' In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had the governmental activities capital assets records been subjected to audit procedures and not providing an adequate allowance for depreciation and expense for the governmental activities � as decribed in the preceeding paragraphs, the financial statements referred to above present fairly, in all material respects, the financial position 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 � December 31, 2008, and the respective changes in financial position and cash flows, where applicable, thereof and for the year then ended in conformity with U.S. generally accepted accounting principles. � � ��.,r,�� LarsonAllen LLP is a member of Nexia lnterna[io(al)a worldwide network of indepcndent accounting and consulting firms. IN7F.RNATION'AL ' � � i i 1 i � i 1 1 1 1 1 1 1 1 1 1 ' Honorable Mayor � Members of the City Council and Citizens City of Scandia � In accordance with Government Auditin Standards we have also issued a re ort d 9 p ated April 2, 2009 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. , The managemenYs discussion and analysis and budgetary comparison information as listed in the table of contents is not a required part of the basic financial statements but supplementary information � required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquires of management regarding the methods of ineasurement and presentation of the required supplementary information. However, we did not audit the information and � express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that ' collectively comprise the City's basic financial statements. The accompanying supplementary information, such as the introductory section and combining fund financial statements listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information, except for the introductory section on which we express no ' opinion, has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financiai statements taken as a whole. � �� , LarsonAllen LLP Minneapolis, Minnesota � April 2, 2009 ' � , , � � �2� ' i � 1 i 1 � 1 1 1 i i i i 1 1 1 � 1 � � � ' � ` REQUIRED SUPPLEMENTARY INFORMATION � ' ' � ' i 1 � 1 � t 1 1 � � � i 1 ! 1 1 1 1 1 1 t � ! � 1 1 i � CITY OF SCANDIA MINNESOTA � � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 � 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 fiscal year ended December 31, 2008. Financial Highlights ' o The City's net assets of its governmental activities increased by $511,399 during the year to $5,351,383 at year-end. o The General Fund balance increased by $503,767 during the year to $523,449 at year-end. , o The net assets of the City's business-type activities (Sewer Enterprise Fund) decreased by $31,069 during the year to $1,050,455. ' o The Sewer Enterprise Fund reported an operating loss of$30,645. ' 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) r � � � � � � � N � � � � � � � � i � ' CITY OF SCANDIA, MINNESOTA � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 ' 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 governmenfal 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 government's 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, 2004 Improvement Bond, 2007 Improvement � Bond, 2000 Fire Hall Bond, and Capital Projects Fund. Data from the other governmental funds are combined into a single, 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 17 21 of this report. ' Proprietary Funds. The proprietary funds are used to report the same functions presented as 6usiness-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 ' sewer operations. The sewer fund is considered to be a major fund of the City. i 1 � (4) ' i 1 ! � 1 i ! M ! 1 1 � 1 � ! 1 1 � � CITY OF SCANDIA MINNESOTA � � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 � Fund Financiai Statements (Continued) � Proprietary Funds(Continued) The basic proprietary fund financial statements can be found on pages 23-25 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 27-42 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 46-49 of this report. � Government-Wide Financial Analysis Beginning with the year ended December 31, 2004, financial statements were 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. � For fiscal year 2008, the City has not maintained detailed capital asset records and has not computed depreciation on governmental activity assets. All capital expenditures should be capitalized and depreciated over their estimated useful lives to conform with accounting principles generally accepted � in the United States of America. The effects on the financial statements of the preceding practices are not reasonably determinable. The City has established a capital assets policy and will implement the policy during 2009. � � � � (5) � CITY OF SCANDIA MINNESOTA , � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 r EXHIBIT 1: CITY OF SCANDIA'S NET ASSETS ' Governmental Activities Business-Type Activities Totals 2008 2007 2008 2007 2008 2007 Current and OtherAssets $ 1,649,919 $ 2,628,356 $ 127,194 $ 146,568 $ 1,777,113 $ 2,774,924 � Capital Assets,Net 5,949,923 5,936,973 930,000 960,000 6,879,923 6,896,973 TotalAssets 7,599,842 8,565,329 1,057,194 1,106,568 8,657,036 9,671,897 Current Liabilities 163,802 172,930 6,739 25,044 170,541 197,974 � Long-Term Liabilities 2,084,657 3,552,415 - - 2,084,657 3,552,415 Total Liabilities 2,248,459 3,725,345 6,739 25,044 2,255,198 3,750,389 Net Assets � Invested in Capital Assets Net of Related Debt 3,844,923 3,769,742 930,000 960,000 4,774,923 4,729,742 Restricted for Debt Retirement 375,805 1,374,293 375,805 1,374,293 Unrestricted 1,130,655 (304,051) 120,455 121,524 1,251,110 (182,527) Total NetAssets 5,351,383 4,839,984 $ 1,050,455 1,081,524 6,401,838 5,921,508 � 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 $6,401,838 at the close of the most recent fiscal year. The largest portion of the City's net assets (75%) 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 (7%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets ($1,251,110) , may be used to meet the City's ongoing obligations to citizens and creditors. , � � � ' � (s) � � � i � � r � � � � � � � � � t � � � CITY OF SCANDIA, MINNESOTA � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 � EXHIBIT 2: CHANGES IN NET ASSETS ` Governmental Activities Business-Type Activities Totals 2008 2007 2008 2007 2008 2007 REVENUES � Proqram Revenues Charges for Services $ 286,504 $ 655,429 $ 57,010 $ 22,024 $ 343,514 $ 677,453 Operating Grants and Contributions 29,463 16,500 - - 29,463 16,500 Capitai Grants and Contributions 28,484 354,151 3,328 13,903 31,812 368,054 � General Revenues Property Taxes 1,645,374 1,487,406 1,645,374 1,487,406 OtherTaxes - - - _ _ _ _ Grants and Contributions Not ' Restricted for a Particular Purpose 42,709 102,508 - - 42,709 102,508 Other 41,829 87,984 2,915 4,948 44,744 92,932 TotalRevenues 2,074,363 2,703,978 63,253 40,875 2,137,616 2,744,853 � EXPENSES General Government 554,020 532,636 554,020 532,636 Public Safety 385,665 325,752 - - 385,665 325,752 Public Works 419,324 51,365 - - 419,324 51,365 � Highway and Streets - 565,080 - _ - 565,080 Parks and Recreation 108,059 89,563 108,059 89,563 Fixed and Other - 10,310 - - - 10,310 Interest and Fiscal Charges 99,235 119,792 - - 99,235 119,792 � Sewer - - 90,983 70,081 90,983 70,081 TotalExpenses 1,566,303 1,694,498 90,983 70,081 1,657,286 1,764,579 TRANSFERS 3,339 - (3,339) - - _ ' CHANGE IN NET ASSETS 511,399 1,009,480 (31,069) (29,206) 480,330 980,274 Net Assets-Beginning of Year 4,839,984 3,830,504 1,081,524 1,110,730 5,921,508 4,941,234 NET ASSETS-END OF YEAR $ 5,351,383 $ 4,839,984 $ 1,050,455 $ 1,081,524 $ 6,401,838 $ 5,921,508 � Governmental Activities. Governmental activities increased the Cit 's net assets b $511,399. Y Y , Business-Type Activities. Business-type expenses by program-governmental activity decreased the City's net assets by $31,069. ' � � � r � (7) � CITY OF SCANDIA, MINNESOTA � MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 � The following is a graphical representation of the various sources of the city's governmental revenues ' (excluding transfers)of$2,074,363: � Governmental Activities Revenues by Source 2008 ■Fees,Charges,and Other ■Operating Grants � OOther General and Contributions Revenue �3'8��° 1.4% 2.0% O Capital Grants and Contributions ' 1.4% � Grants and Contributions not � Restricted for a ■Property Taxes Particular Purpose 79.3% 2.1% � , The following is a graphical representation of the various sources of the city's governmental expenses of$1,566,303 and program revenues of$344,451: , Expenses and Program Revenues -Governmental Activities � $600,000 --�--- I � �■Expenses $500,000 _________ _ ■Program Revenues � $400,000 - - - _ _ _ - - - - - - _ _ _ J � � $300,000 � 3 $200�000 - _ _ _ _ - _ � _ _ _ . � $100,000 � i $- -- -- - -- General Public Safety Public Works Parks and Interest and Fiscal ' ' Government Recreation Charges � - - - - . _ - _ _--- . - _ _ __ _ . _ - _ __ _ _ _ - ---- -- --- - - - - � �8) � � � � ' � � ' � � ' ' � � � � , � � r � CITY OF SCANDIA, MINNESOTA ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 ' The following is a graphical representation of the various sources of the City's business-type revenues ' of$63,253: Revenue by Source-Business-Type Activities ' _ome� Granls&Contributions q go� 137% 1 ' Charges for Services ' 90.1% The following is a graphical representation of the various sources of the City's business-type expenses ' of$90,983 and program revenues of$60,338: ' Expenses and Program Revenues-Business-Type Activities ' I 100,000 -__�-----_ ____---._.._ I 90,00o O Expenses ' � 80,000 ■Program Revenues ' I 70�000 --- — - i , 60,000 -- - i I � S ' I 50,000 ; 40,000 � ' I 30,000 ( 20,000 10,000 --- ' _ � - I ' Sewer � � ' , (9) , � , 1 1 , 1 1 1 ' 1 1 ' 1 , , , ' ' ' ' CITY OF SCANDIA MINNESOTA � ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 ' Financiai Analysis of the Government's 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 spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful ' measure of a government's net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, all of the City's governmental funds together reported combined ending fund balances of $1,181,936, a decrease of $892,310 in comparison with the prior year. (Much ' of this decrease is due to the crossover refunding of the G.O. Improvement Bonds of 2002 with the G.O. Refunding Bonds of 2005.) Of the $1,186,380 fund balance, approximately 67.5% ($796,816) constitutes unreseived fund ba/ance, which is available for spending at the City's discretion. The ' remainder of fund balance is reserved to indicate that it is not available for new spending because it has already been committed to pay debt service ($385,120). ' The General Fund is the chief operating fund of the City. At the end of the current year, unreserved fund balance of the General Fund was $523,449, an increase of $503,767 over the prior fiscal year. Key factors in this change in fund balance are as follows: , o On January 1, 2008, the City closed its special revenue funds and absorbed them into the general fund. Before 2008, separate funds were maintained for different types of operational ' expenditures (police, fire, road and bridge, etc.) They were combined to simplify accounting and to resolve operating surpluses and deficits among the various governmental funds. This increased the fund balance of the general fund by $299,058. o Actual expenditures totaled $1,405,650 (excluding transfers) for 2008 compared to budgeted , expenditures of$1,607,557. o Actual revenues totaled $1,647,020 for 2008 compared to budgeted revenues of $1,659,467, a net unfavorable variance of$12,447 (before transfers). ' As a measure of the General Fund's liquidity, it may be useful to compare the fund balance to total fund expenditures. Unreserved fund balance represents 37% of total 2008 General Fund expenditures ' (after transfers in and transfers out). Because prope�ty 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 37% unreserved balance in the General Fund is not adequate for cash ' flow purposes. Therefore, the city must borrow from other, reserved funds for cash flow purposes during the first half of the year. As total fund balances decrease, the risk increases that inter-fund borrowing will not be sufficient to cover cash flow needs. A better long-term goal would be to maintain fund balances of 45 or 50 percent of total expenditures. , , , (10) ' 1 ' ' , ' ' ' , ' ' ' ' ' ' ' ' ' , ' CITY OF SCANDIA MINNESOTA � ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 ' General Fund Budgetary Highlights ' Detail of the General Fund original budget, final budget and actual revenues and expenditures can be found beginning on page 43 of this report. The net change in the General Fund Balance was $503,767. ' The City Council approved the following budget amendments during the year: o Capital Improvement fund budgeted to sealcoat the building parking lot. This did not take place ' in 2008 so the capital outlay budget was reduced by $14,000. o Public Works Capital Outlay expenditure budget was increased $5,310 for addition of the garage seal caating. , o Fire Capital Outlay expenditure budget was increased $3,410 to reflect the actual cost to sealcoat the garage floor. Actual expenditures exceeded budgets in several cases (see pages 43-44). Excess expenditures to the ' Planning and Building department budget were due primarily to consultant costs for reviewing permits, which are reimbursed by applicants resulting in an off-setting increase in revenues ("zoning and hearing fees"). Actual expenditures exceeded the Police department budget due to an unanticipated ' increase in contractual costs from Washington County. Actual expenditures exceeded the Fire department budget due primarily to an emergency well repair, off-set by revenue from an insurance claim. ' Actual expenditures were less than budgets in several departments. Spending in the Public Works Department was $222,228 less than budgeted, which largely explains the net spending of $201,907 , less than the overall General Fund Budget. Property tax revenues were less than expected in 2008, partially due to the State of Minnesota's , "unallotment" of a $24,035 Market Value Homestead Credit (MVHC) reimbursement that had been scheduled to be paid at the end of 2008. MVHC is a state program to reimburse cities for a property tax credit for homeowners. ' 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 Sewer operations at the end of the year amounted to $120,455. , ' ' ' , (11) � CITY OF SCANDIA, MINNESOTA ' MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2008 ' 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, 2008, amounts to $6,879,923 (net of accumulated depreciation). , CITY OF SCANDIA'S CAPITAL ASSETS (Net of Depreciation) ' Governmental Business-Type Activities Activities Totals _ 2008 2007 2008 2007 2008 2007 � Land $ 715,450 $ 702,500 $ _ $ _ $ 715,450 $ 702,500 Construction in Process 1,464,379 1,464,379 Buildings 1,966,800 1,966,800 - - 1,966,800 1,966,800 Equipment and Vehicles 1,011,494 1,011,494 - - 1,011,494 1,011,494 � Infrastructure 1,464,379 - - - 1,464,379 - Furniture and Fixtures 372,362 372,362 372,362 372,362 Miscellaneous Assets 419,438 419,438 - - 419,438 419,438 SewerSystem - - 1,500,000 1,500,000 1,500,000 1,500,000 ' Less:Accumulated Depreciation - - (570,000) (540,000) (570,000) (540,000) Totat 5,949,923 5,936,973 930,000 960,000 6,879,923 6,896,973 Long-Term Debt. At the end of the current fiscal year, the City had total bonded debt outstanding of � $2,105,000. 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 2008 2007 2008 2007 2008 2007 ' LONG-TERM OBLIGATIONS Long-Term Debt: General Obligation Notes $ 2,105,000 $ 3,565,000 $ - $ - $ 2,105,000 $ 3,565,000 Unamortized Bond Discount (36,043) (31,616) - - (36,043) (31,616) � Compensated Absences 15,700 19,031 - - 15,700 19,031 Total 2,084,657 3,552,415 � �- 2,084,657 3,552,415 � 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 prepared a balanced budget for the General Fund for 2009. Staff will continually monitor the budget and recommend any revisions that are deemed necessary to the City Council. Proposals currently under discussion at the State Legislature are expected to ' reduce property tax revenue colle�tion in 2009 by the full amount of the anticipated MVHC reimbursement. The full impact on 2009 revenues may not be known until late spring of 2009, but are expected to be at least $47,379 (the amount scheduled for 2008) but no more than ' $93,975 (5.5% of the city's revenue base). Until the full amount of the impact is known and formal budget amendments/reductions are made, discretionary expenditures should be minimized or delayed to the extent practical. , , (12) � CITY OF SCANDIA, MtNNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS ' YEAR ENDED DECEMBER 31, 2008 � Economic Factors and Next Year's Bud ets and Rates Con ' g ( tinued) ' o During the current economic downturn the City will continue to experience slow or no growth, and the revenues from permits will continue to be below historic levels. There is some indication that the decline in values may by leveling off, and construction activity might begin to increase , late in 2009 or 2010. In 2010, the City will be limited in spending increases due to the continuation of levy limits on cities over 2,500 population. The impacts on Scandia will be determined by current discussions at the State Legislature. For example, the city may or may � not be able to levy to make up for the loss of MVHC reimbursements in 2009. Staff will continue to monitor the changes in this area to prepare for 2010 budget discussions, which will begin in July of 2009. ' 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 2pg`n � St. N_, Scandia, Minnesota 55073 (telephone 651-433-2274). ' � ' � � � � � � � (13) ! 1 1 1 1 i 1 i 1 1 1 1 1 1 1 1 ! I i