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9.a) Financial Statements and Supplementary Information-Year Ended December 31, 2012 CITY OF SCANDIA, MINNESOTA FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION YEAR ENDED DECEMBER 31, 2012 City of Scandia 14727 209th Street North Scandia, Minnesota 55073 . CITY OF SCANDIA, MINNESOTA TABLE OF CONTENTS YEAR ENDED DECEMBER 31, 2012 I. INTRODUCTORY SECTION Elected and Appointed Officials II. FINANCIAL SECTION Independent Auditors' Report 1 REQUIRED SUPPLEMENTARY INFORMATION Management's Discussion and Analysis 4 Basic Financial Statements Statement of Net Position 14 Statement of Activities 15 Balance Sheet—Governmental Funds 17 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position —Governmental Activities 18 Statement of Revenues, Expenditures, and Changes in Fund Balance— Governmental Funds 19 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities— Governmental Activities 20 Statement of Net Position — Proprietary Funds 21 Statement of Revenues, Expenses, and Changes in Net Position — Proprietary Funds 22 Statement of Cash Flows— Proprietary Funds 23 Statement of Net Position — Fiduciary Fund 24 Notes to Basic Financial Statements 25 Required Supplementary Information — Budgetary Comparison Information Schedule of Revenues, Expenditures and Changes in Fund Balance— Budget and Actual — General Fund 44 Notes to Required Supplementary Information 46 Combining Fund Financial Statements Combining Balance Sheet— Nonmajor Governmental Funds 47 Combining Statement of Revenues, Expenditures and Changes in Fund Balance— Nonmajor Governmental Funds 48 Statement of Changes in Assets and Liabilities— Fiduciary Funds 49 CITY OF SCANDIA, MINNESOTA TABLE OF CONTENTS (CONTINUED) YEAR ENDED DECEMBER 31, 2012 Iil. OTHER REQUIRED REPORTS Independent Auditors' Report on Minnesota Legal Compliance 50 Independent Auditors' Report on Internal Control Over Financial Reporting and on Copliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 51 I. INTRODUCTORY SECTION CITY OF SCANDIA, MINNESOTA ELECTED AND APPOINTED OFFICIALS DECEMBER 31, 2012 Elected Position Randall Simonson Mayor Connie Amos Council Member Chris Ness Council Member Sally Swanson Council Member Jim Schnieder Council Member Appointed Kristina Handt Clerk Colleen Firkus Treasurer n. FINANCIAL SECTION �. (�iftonLarsa�Allen LLP � www_diftonlarsonallen.00m CliftonLarsonAllen INDEPENDENT AUDITORS' REPORT Honorable Mayor and Members of the City Council and Citizens City of Scandia, Minnesota Report on the Financial Statements 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 (the City), as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibilify for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors'Responsibility 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 assurances about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statemens in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we express no such opinion. An audit also includes evalutating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. � a���aew�M�,rte�or rkx�iMe�o��ai ��� INTERNATIONAL Honorable Mayor and Members of the City Council and Citizens City of Scandia, Minnesota Opinions In our opinions, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City, as of December 31, 2012, 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. Other Matters Required Supplemenfary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and budgetary comparison information, as listed in 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. Other Information 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. Such 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. (2) Honorable Mayor and Members of the City Council and Citizens City of Scandia, Minnesota Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated May 6, 2013, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 result of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control over financial reporting and compliance. LL.� CliftonLarsonAllen LLP Minneapolis, Minnesota May 6, 2013 (3) REQUIRED SUPPLEMENTARY INFORMATION CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 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, 2012. Financial Highlights o The City's net position of its governmental activities increased by $65,348 during the year to $10,314,870 at year-end. o The total fund balance of the General Fund increased by $75,877 during the year to $1,329,553 at year-end. o The net position of the City's business-type activities (201 Sewer and Uptown Sewer Enterprise Funds) increased by $113,137 during the year to $1,143,439. 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 position presents information on all of the City's assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position 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 position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the fiming 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. (4) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 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 spendab/e 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 governmenfal 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, 2007 Improvement Bond Debt Service Fund, and the Equipment Replacement Capital Project 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 17-20 of this report. Proprietary Funds. The proprietary funds are used to report the same functions presented as business-type acfivities 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 and Uptown Sewer Funds, which are considered to be major funds of the City. (5) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 Fund Financial Statements (Continued) Propriefary Funds (Continued) The basic proprietary fund financial statements can be found on pages 21-23 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 25-43 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 47-48 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 Managemenf's Discussion and Analysis-for Sfate 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 position and how they have changed. Net position, the difference befinreen 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 position 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 position balance as a starting point to evaluate future years' results, rather than to focus on the current balance. (6) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 EXHIBIT 1: CITY OF SCANDIA'S NET POSITION Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 Current and OtherAssets $ 2,604,321 $ 2,632,021 $ 145,792 $ 219,098 $ 2,750,113 $ 2,851,119 CapitalAssets,Net 9,105,424 9,401,146 1,019,890 840,000 10,125,314 10,241,146 Total Assets 11,709,745 12,033,167 1,165,682 1,059,098 12,875,427 13,092,265 Current Liabilities 163,922 247,863 22,243 28,796 186,165 276,659 Long-Term Liabilities 1,230,953 1,535,782 - - 1,230,953 1,535,782 Total Liabilities 1,394,875 1,783,645 22,243 28,796 1,417,118 1,812,441 Net Position: Net Investment in Capital Assets 7,889,487 7,884,454 1,019,890 840,000 8,909,377 8,724,454 Restricted for Debt Retirement 592,307 596,540 - - 592,307 596,540 Restricted for Road Maintenance 123,651 122,573 - - 123,651 122,573 Unrestricted 1,709,425 1,645,955 123,549 190,302 1,832,974 1,836,257 Total Net Position $ 10,314,870 $ 10,249,522 $ 1,143,439 $ 1,030,302 $ 11,458,309 $ 11,279,824 As noted earlier, net position may serve over time as a useful indicator of a government's financial position. In the case of the City, assets exceeded liabilities by $11,458,308 at the close of the most recent fiscal year. The largest portion of the City's net position (78%) 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 nof 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 position (6%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net position ($1,838,029) may be used to meet the City's ongoing obligations to citizens and creditors. (�) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 EXHIBIT 2: CHANGES IN NET POSITION Governmental Activities Business-Type Activities Totals 2012 2011 2012 2011 2012 2011 REVENUES Proaram Revenues Charges for Services $ 342,434 $ 357,179 $ 80,275 $ 66,203 $ 422,709 $ 423,382 Operating Grants and Contributions 25,381 44,380 - - 25,381 44,380 Capital Grants and Contributions 7,129 25,799 5,151 - 12,280 25,799 General Revenues PropertyTaxes 2,073,163 1,921,044 - - 2,073,163 1,921,044 Grants and Contributions Not Restricted for a Particular Purpose 18,918 9,330 - - 18,918 9,330 Other 10,878 16,973 723 1,205 11,601 18,178 Total Revenues 2,477,903 2,374,705 86,149 67,408 2,564,052 2,442,113 EXPENSES General Government 736,560 687,731 - - 736,560 687,731 Public Safety 383,522 425,673 - - 383,522 425,673 Public Works 960,724 848,899 - - 960,724 848,899 Parks and Recreation 95,567 133,215 - - 95,567 133,215 Interest and Fiscal Charges 65,573 68,364 - - 65,573 68,364 Sewer - - 143,621 91,029 143,621 91,029 Total Expenses 2,241,946 2,163,882 143,621 91,029 2,385,567 2,254,911 TRANSFERS (170,609) 3,645 170,609 (3,645) - - CHANGE IN NET POSITION 65,348 214,468 113,137 (27,266) 178,485 187,202 Net Position-Beginning of Year 10,249,522 10,035,054 1,030,302 1,057,568 11,279,824 11,092,622 NET POSITION-END OF YEAR $ 10,314,870 $ 10,249,522 $ 1,143,439 $ 1,030,302 $ 11,458,309 $ 11,279,824 Governmental Activities. Governmental activities increased the City's net position by $65,348. Business-Type Activities. Business-type expenses (201 Sewer and Uptown Sewer Enterprise Funds) increased the City's net position by $113,137. (8) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 The following is a graphical representation of the various sources of the City's governmental revenues (excluding transfers) of$2,477,903: Governmental Activities Revenue by Source 2012 ■Fees,Charges,and Other ■OperatingGrantsand ■OtherGeneralRevenue 14��0 ontributions 0% 1% ❑Capital Grantsand Contributions 0% o Grants andContributions Not Restricted for a Particular Purpose ■PropertyTaxes �o�a 84% The following is a graphical representation of the various sources of the City's governmental expenses of$2,241,947 and program revenues of$374,944: Expenses and Program Revenues- Governmental Activities $1,200,000 ■Expenses $1,000,000 ■Program Revenues $800,000 $600,000 $400,000 $200,000 $- General Government Public Safety Public Works Parks and Interest and Fiscal Recreation Charges �9) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 The following is a graphical representation of the various sources of the City's business-type revenues of$86,149: Business-Type Activities Revenue by Source 2012 Other Grants&Contributions ��8% 6.0% ChargesforServices 93.2% The following is a graphical representation of the various sources of the City's business-type expenses of$143,621 and program revenues of$85,426: Expenses and Program Revenues-Business-Type Activities $140,000 $120,000 �Expenses � . � " ` ■Program Revenues . $100,000 � � $80,000 �' $60,000 ��: .::. �'; � �O�000 f> d ��;. X �~id 1, �Z���QD _ � . W- 201 Sewer Uptown Sewer (10) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 Financial Analysis of the Government's Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance- related legal requirements. Governmenfal 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, unassigned 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 $2,247,425, an increase of $69,943 in comparison with the prior year. Of the $2,247,425 fund balance, 72% ($1,626,825) constitutes unrestricted fund balance, which is available for spending at the City's discretion. The unresfricted fund balance is broken into two categories, assigned and unassigned. Unassigned fund balance represents 52% ($1,177,870) and assigned fund balance represents 20% ($448,955). The remainder of the fund balance consists of nonspendable and restricted fund balance. Nonspendable fund ba/ance constitutes 1% ($28,032) and restricted fund ba/ance constitutes 26% ($592,568). 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 $1,329,553, an increase of $75,877 over the prior fiscal year. Key factors in this change in fund balance are as follows: o Actual expenditures totaled $1,843,649 (excluding transfers) for 2012 compared to budgeted expenditures of$1,769,009, a net variance of$74,640. o Actual revenues totaled $1,994,957 for 2012 compared to budgeted revenues of $1,836,680, a net favorable variance of $158,277 (before transfers). Revenue from Zoning and Hearing Fees were $105,026 more than budgeted due to reimbursements for the Zavoral Mine EIS. Intergovernmental Revenue was $25,902 more than budgeted due to unanticipated State Market Value Credit payments and Fire State Aid. Donations and Other Revenue were $25,239 more than budgeted due to a large insurance dividend ($12,900), Insurance Premium Refunds ($2,313), Impound Fees ($910), and Donations. 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 $1,117,870 of unassigned fund balance in the General Fund is adequate for cash flow purposes. (11) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 General Fund Budgetary Highlights Detail of the General Fund original budget, final budget and actual revenues and expenditures can be found beginning on page 44 of this report. The net change in the General Fund Balance was $75,877. The City Council approved the following budget amendments during the year: o Increased Other Professional Services by $7,300 to pay for a City Administrator search and hiring contract with Springsted, Inc. o Increased Donations by $1,000 in Administration & Finance and reduce Council Conference and Seminars by $1,000 to make a donation to the Washington County Historical Society for its Heritage Center. o Increased Fire revenue Donations by $2,000 and increase Fire expense Small Tools and Minor Equipment to accept a Lions Club donation for the purchase of a winch and trailer for the Fire Department. o Reduce Contractual Road Maintenance, Regular Wages and Health Insurance line items in the Public Works budget to meet equipment needs, which resulted in a net decrease in the budget of$176. o Reduced several lines items in the Fire Department budget to cover the purchase of two tablet computers for $6,657 needed for interdepartmental emergency communications and an increase in Turnout Gear and Uniforms required for new firefighters. Actual expenditures were less than budgets in several departments. Spending in the Public Safety Department was $20,688 less than budgeted (largely due to under-spending in Fire). Spending in Public Works was $68,804 less than budgeted (largely due to under-spending for personnel, engineering and gravel/salt budgets. Spending in General Government Departments was $172,158 higher than budgeted (largely due to the Zavoral Mine EIS expenses). Spending in Parks and Recreation was $8,026 less than budgeted due to changes made in facilities and grounds maintenance. 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 position of the 201 Sewer operations at the end of the year amounted to $167,904. Unrestricted net position of the Uptown Sewer operations at the end of the year amounted to ($44,355). 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, 2012, amounts to $10,125,314 (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 1.1%. (12) CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR ENDED DECEMBER 31, 2012 CITY OF SCANDIA'S CAPITAL ASSETS (Net of Depreciation) Governmental Business-Type Activities Activities Totals 2012 2011 2012 2011 2012 2011 Land $ 487,735 $ 487,735 $ - $ - $ 487,735 $ 487,735 Construction in Process - 111,852 - - - 111,852 Buildings 2,232,670 2,232,670 - - 2,232,670 2,232,670 Equipment and Vehicles 1,641,953 1,371,717 - - 1,641,953 1,371,717 Infrastructure 9,273,769 9,359,242 - - 9,273,769 9,359,242 Other Improvements 162,647 162,647 - - 162,647 162,647 SewerSystem - - 1,500,000 1,500,000 1,500,000 1,500,000 Uptown Sewer - - 243,827 - 243,827 - Less:Accumulated Depreciation (4,693,350) (4,324,717) (723,937) (660,000) (5,417,287) (4,984,717) Total $ 9,105,424 $ 9,401,146 $ 1,019,890 $ 840,000 $ 10,125,314 $ 10,241,146 Long-Term Debt. At the end of the current fiscal year, the City had total bonded debt outstanding of $1,235,000. 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 2012 2011 2012 2011 2012 2011 LONG-TERM OBLIGATIONS Long-Term Debt: General Obligation Notes $ 1,235,000 $ 1,540,000 $ - $ - $ 1,235,000 $ 1,540,000 Unamortized Bond Discount (19,063) (23,308) - - (19,063) (23,308) Compensated Absences 15,016 19,090 - - 15,016 19,090 Total $ 1,230,953 $ 1,535,782 $ - $ - 1,230,953 $ 1,535,782 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 2013. 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 2014 budget discussions, which will begin in June of 2013. 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). (13) BASIC FINANCIAL STATEMENTS CITY OF SCANDIA, MINNESOTA STATEMENT OF NET POSITION DECEMBER 31, 2012 Governmental Business-Type Activities Activities Totals ASSETS Cash and Investments $ 2,274,415 $ 164,529 $ 2,438,944 Receivables: Taxes and Other 122,912 11,939 134,851 Special Assessments 128,783 8,912 137,695 Internal Balances 39,588 (39,588) - Unamortized Issuance Costs 10,591 - 10,591 Prepaid Items 22,392 - 22,392 Inventory 5,640 - 5,640 Capital Assets, Nondepreciable 487,735 - 487,735 Capital Assets, Net of Accumulated Depreciation 8,617,689 1,019,890 9,637,579 Total Assets 11,709,745 1,165,682 12,875,427 LIABILITIES Accounts and Contracts Payable 128,301 22,243 150,544 Accrued Payroll, Taxes and Benefits 27,643 - 27,643 Interest Payable 5,408 - 5,408 Unearned Revenue 2,570 - 2,570 Noncurrent Liabilities: Due Within One Year 317,355 - 317,355 Due in More Than One Year 913,598 - 913,598 Total Liabilities 1,394,875 22,243 1,417,118 NET POSITION Net Investment in Capital Assets 7,889,487 1,019,890 8,909,377 Restricted for Debt Retirement 592,307 - 592,307 Restricted for Road Maintenance 123,651 - 123,651 Unrestricted 1,709,425 123,549 1,832,974 Total Net Position $ 10,314,870 $ 1,143,439 $ 11,458,309 See accompanying Notes to Basic Financial Statements. (14) CITY OF SCANDIA, MINNESOTA STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2012 Pro ram Revenues perating apita rants Charges for Grants and and FUNCTIONSIPROGRAMS Expenses Service Contributions Contributions Government Activities: General Government $ 736,560 $ 260,647 $ - $ - Public Safety 383,522 33,551 25,381 - Public Works 960,724 1,244 - 7,129 Parks and Recreation 95,567 39,769 - - Interest and Fiscal Charges 65,573 7,223 - - Total Governmental Activities 2,241,946 342,434 25,381 7,129 Business-Type Activities: Sewer 126,143 70,696 - 5,151 Uptown Sewer 17,478 9,579 - - Total Business-Type Activities 143,621 80,275 - 5,151 Total Primary Government $ 2,385,567 $ 422,709 $ 25,381 $ 12,280 GENERALREVENUES Taxes: Property Taxes, Levied for General Purposes Grants and Contributions not Restricted for a Particular Purpose Investment Earnings Total General Revenues Transfers CHANGE IN NET POSITION Net Position - Beginning of Year NET POSITION -END OF YEAR See accompanying Notes to Basic Financial Statements. (15) Net(Expense) Revenue and Changes in Net Position Governmental Business-Type Activities Activities Total $ (475,913) $ - $ (475,913) (324,590) - (324,590) (952,351) - (952,351) (55,798) - (55,798) (58,350) - (58,350) (1,867,002) - (1,867,002) - (50,296) (50,296) - (7,899) (7,899) - (58,195) (58,195) (1,867,002) (58,195) (1,925,197) 2,073,163 - 2,073,163 18,918 - 18,918 10,878 723 11,601 2,102,959 723 2,103,682 (170,609) 170,609 - 65,348 113,137 178,485 10,249,522 1,030,302 11,279,824 $ 10,314,870 $ 1,143,439 $ 11,458,309 (16) CITY OF SCANDIA, MINNESOTA BALANCE SHEET GOVERNMENTALFUNDS DECEMBER 31, 2012 200� Improvement Equipment Nonmajor General Bond Replacement Governmental Fund Debt Service Fund Funds Totals ASSETS Cash and Investments $ 1,396,131 $ 240,996 $ 222,393 $ 414,895 $ 2,274,415 Taxes Receivable 92,792 15 - 8 92,815 Special Assessments Receivable - 128,783 - - 128,783 Other Receivables 30,097 - - - 30,097 Prepaid Items 22,392 - - - 22,392 Inventory 5,640 - - - 5,640 Advance to Other Funds - - - 39,588 39,588 Total Assets $ 1,547,052 $ 369,794 $ 222,393 $ 454,491 $ 2,593,730 LIABILITIES AND FUND BALANCES Liabilities: Accounts and Contracts Payable $ 128,301 $ - $ - $ - $ 128,301 Accrued Payroll,Taxes and Benefits 27,643 - - - 27,643 Deferred Revenue 61,555 128,798 - 8 190,361 Total Liabilities 217,499 128,798 - 8 346,305 Fund Balances: Nonspendable: Prepaid Items 22,392 - - - 22,392 Inventory 5,640 - - - 5,640 Advance to Other Funds - - - 39,588 39,588 Restricted for: Debt Service - 240,996 - 227,921 468,917 Road Maintenance 123,651 - - - 123,651 Assigned for: Infrastructure Improvement Projects - - - 177,568 177,568 Acquisition and Development of Parks - - - 9,406 9,406 Equipment Replacement - - 222,393 - 222,393 Unassigned 1,177,870 - - - 1,177,870 Total Fund Balances 1,329,553 240,996 222,393 454,483 2,247,425 Total Liabilities and Fund Balances $ 1,547,052 $ 369,794 $ 222,393 $ 454,491 $ 2,593,730 See accompanying Notes to Basic Financial Statements. (17) CITY OF SCANDIA, MINNESOTA RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION GOVERNMENTAL ACTIVITIES DECEMBER 31, 2012 TOTAL FUND BALANCES FOR GOVERNMENTAL FUNDS $ 2,247,425 Total net position reported for governmental activities in the statement of net position is different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. Capital Assets $ 13,798,774 Less: Accumulated Depreciation (4,693,350) 9,105,424 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 59,006 Other Special Assessments 128,785 187,791 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 position. 10,591 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 (1,230,953) Accrued Interest on Long-Term Debt (5,408) (1,236,361) TOTAL NET POSITION OF GOVERNMENTAL ACTIVITIES $ 10,314,870 See accompanying Notes to Basic Financial Statements. (18) CITY OF SCANDIA, MINNESOTA STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 200� Improvement Equipment Nonmajor Total General Bond Replacement Governmental Governmental Fund Debt Service Fund Funds Funds REVENUES Taxes $ 1,601,201 $ 146,902 $ - $ 312,375 $ 2,060,478 Special Assessments - 32,245 - - 32,245 Intergovernmental Revenue 51,199 - - - 51,199 Licenses and Permits 54,657 - - - 54,657 Charges for Services 234,170 - - - 234,170 Fines and Forfeits 17,818 - - - 17,818 Miscellaneous Revenue 35,912 914 1,113 1,828 39,767 Total Revenues 1,994,957 180,061 1,113 314,203 2,490,334 EXPENDITURES Current: General Government 708,965 - - - 708,965 Public Safety 338,231 - - - 338,231 Public Works 636,322 - - - 636,322 Parks and Recreation Center 82,326 - - - 82,326 Fixed and Other 1,000 - - - 1,000 Debt Service: Principal Payments - 135,000 - 170,000 305,000 Interest Payments - 30,850 - 29,207 60,057 Capital Outlay: General Government 1,946 - - - 1,946 Public Safety 8,980 - 93,914 - 102,894 Public Works 63,479 - - - 63,479 Parks and Recreation Center 2,400 - - 3,574 5,974 Total Expenditures 1,843,649 165,850 93,914 202,781 2,306,194 EXCESS(DEFICIENCY)OF REVENUES OVER(UNDER)EXPENDITURES 151,308 14,211 (92,801) 111,422 184,140 OTHER FINANCING SOURCES(USES) Transfer In 4,569 - 80,000 - 84,569 Transfer Out (80,000) - - (118,766) (198,766) Total Other Financing Sources(Uses) (75,431) - 80,000 (118,766) (114,197) NET CHANGE IN FUND BALANCES 75,877 14,211 (12,801) (7,344) 69,943 Fund Balances-Beginning of Year 1,253,676 226,785 235,194 461,827 2,177,482 FUND BALANCES -END OF YEAR $ 1,329,553 $ 240,996 $ 222,393 $ 454,483 $ 2,247,425 See accompanying Notes to Basic Financial Statements. (19) 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, 2012 NET CHANGE IN FUND BALANCES -TOTAL GOVERNMENTAL FUNDS $ 69,943 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 $ 158,384 Depreciation Expense (397,694) (239,310) 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. (12,431) The governmental funds report bond proceeds as financing sources,while repayment of bond principal is reported as an expenditure. In the statement of net position, 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: Repayment of Bond Principal 305,000 Change in Accrued Interest Expense 1,405 Amortization of Equipment Certificate Issuance Costs (930) Amortization of Bond Issuance Costs (1,746) Amortization of Bond Discount (4,245) 299,484 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. 4,074 A total of$85,473 of infrastructure (net of$29,061 of accumulated depreciation) was transferred from the governmental activities capital assets to the Uptown Sewer Enterprise Fund, as this enterprise fund was established as of January 1, 2012. (56,412) CHANGE IN NET POSITION OF GOVERNMENTAL ACTIVITIES $ 65,348 See accompanying Notes to Basic Financial Statements. (20) CITY OF SCANDIA, MINNESOTA STATEMENT OF NET POSITION PROPRIETARY FUNDS DECEMBER 31, 2012 201 Sewer Uptown Enterprise Sewer Total ASSETS Fund Fund 2012 Current Assets: Cash and Investments $ 164,529 $ - $ 164,529 Special Assessments Receivable 8,912 - 8,912 OtherAccounts Receivable 9,574 2,365 11,939 Due from Other Funds 636 - 636 Total Current Assets 183,651 2,365 186,016 Noncurrent Assets: Capital Assets: Collection Systems 1,500,000 243,827 1,743,827 Less: Accumulated Depreciation (690,000) (33,937) (723,937) Total Capital Assets 810,000 209,890 1,019,890 Total Assets 993,651 212,255 1,205,906 LIABILITIES Current Liabilities: Accounts Payable 15,747 6,496 22,243 Due to Other Funds - 636 636 Total Current Liabilities 15,747 7,132 22,879 Advance from Other Funds - 39,588 39,588 Total Liabilities 15,747 46,720 62,467 NET POSITION Invested in Capital Assets 810,000 209,890 1,019,890 Unrestricted 167,904 (44,355) 123,549 Total Net Position 977,904 165,535 1,143,439 Total Liabilities and Net Position $ 993,651 $ 212,255 $ 1,205,906 See accompanying Notes to Basic Financial Statements. (21) CITY OF SCANDIA, MINNESOTA STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS YEAR ENDED DECEMBER 31, 2012 201 Sewer Uptown Enterprise Sewer Total Fund Fund 2012 OPERATING REVENUES Charges for Service $ 70,696 $ 9,579 $ 80,275 OPERATING EXPENSES Depreciation 30,000 4,876 34,876 Utilities 1,637 377 2,014 Maintenance and Other 94,506 12,225 106,731 Total Operating Expenses 126,143 17,478 143,621 OPERATING LOSS (55,447) (7,899) (63,346) NONOPERATING REVENUE Interest Revenue 723 - 723 Special Assessments 5,151 - 5,151 Total Nonoperating Revenue 5,874 - 5,874 LOSS BEFORE TRANSFERS (49,573) (7,899) (57,472) TRANSFERS Transfer In - 175,178 175,178 Transfer Out (2,825) (1,744) (4,569) Total Transfers (2,825) 173,434 170,609 CHANGE IN NET POSITION (52,398) 165,535 113,137 Net Position - Beginning ofYear 1,030,302 - 1,030,302 NET POSITION -END OF YEAR $ 977,904 $ 165,535 $ 1,143,439 See accompanying Notes to Basic Financial Statements. �22) CITY OF SCANDIA, MINNESOTA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS YEAR ENDED DECEMBER 31, 2012 201 Sewer Uptown Sewer Enterprise Enterprise Fund Fund Total CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers $ 71,570 $ 7,214 $ 78,784 Cash Paid to Suppiiers for Goods and Services (109,192) (6,106) (115,298) Net Cash Provided (Used) by Operating Activities (37,622) 1,108 (36,514) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfer Out (2,825) (1,744) (4,569) Due to/Due from to Cover Negative Cash (636) 636 - Net Cash Used by Noncapital Activities (3,461) (1,108) (4,569) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Purchases of Capital Assets - (158,354) (158,354) Transfer In from Capital Improvement Fund - 118,766 118,766 Advance from Capital Improvement Fund - 39,588 39,588 Net Cash Used for Capital and Related Financing Activities - - - CASH FLOWS FROM INVESTING ACTIVITIES Interest on Investments 723 - 723 NET DECREASE IN CASH AND CASH EQUIVALENTS (40,360) - (40,360) Cash and Cash Equivalents- Beginning of Year 204,889 - 204,889 CASH AND CASH EQUIVALENTS -END OF YEAR $ 164,529 $ - $ 164,529 RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED(USED) BY OPERATING ACTIVITIES Operating Loss $ (55,447) $ (7,899) $ (63,346) Adjustments to Reconcile Operating Loss to Net Cash Provided (Used) by Operating Activities: Depreciation Expense 30,000 4,876 34,876 Special Assessments 5,151 - 5,151 Changes in Asset and Liability Accounts: Increase in Special Assessments Receivable (1,991) - (1,991) Decrease in OtherAccounts Receivable (2,286) (2,365) (4,651) Decrease in Prepayments - - - Increase in Due from County - - - Increase (Decrease)in Accounts Payable (13,049) 6,496 (6,553) Net Cash Provided(Used) by Operating Activities $ (37,622) $ 1,108 $ (36,514) NONCASH CAPITAL FINANCING ACTIVITIES Capital Assets of$56,412 (net of accumulated depreciation)were transferred from Governmental-Activities Capital- Assets to the 201 Uptown Sewer Fund See accompanying Notes to Basic Financial Statements. (23) CITY OF SCANDIA, MINNESOTA STATEMENT OF NET POSITION FIDUCIARY FUND DECEMBER 31, 2012 Agency Fund ASSETS Current Assets: Cash and Investments $ 172,347 LIABILITIES Current Liabilities: Contractor Deposits $ 172,347 See accompanying Notes to Basic Financial Statements. (24) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 unit's 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. (25) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 position 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 general 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 position, 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 position is reported in three parts: (1) net investment in capital assets; (2) restricted net position; and (3) unrestricted net position. 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 governmental funds are aggregated and reported as nonmajor funds. (26) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING 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. Eauipment 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 funds: Sewer Fund The Sewer Fund accounts for customer sewer service charges that are used to finance sewer operating expenses. Uptown Sewer Fund The Uptown Sewer Fund accounts for customer service charges that are used to finance uptown sewer operating expenses. Additionally, the City reports the following fiduciary fund: Aqencv 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. (2�> CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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. 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. 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. (28) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, until adequate resources are received. These interfund payables are eliminated for statement of net position 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 all 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. 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. �29) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 payable (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 2012 totaled $125,828. Receipt of property taxes from this "fiscal disparities pool" does not increase or decrease total tax revenue. (30) • CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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. (31) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 position. 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. (32) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. NET POSITION Net position represents the difference between assets and liabilities in the government- wide financial statements and are classified into three components: a) Net investment in capital assets — This component consists of capital assets net of accumulated depreciation and reduced by the amount of outstanding balance of bonds or other borrowings that are attributable to the acquisition, construction or improvement of those assets. b) Restricted net position — Net position with constraints placed on the use either by 1) external groups such as creditors, grantors, or laws or regulations of other governments; or 2) law through constitutional provisions or enabling legislation are reflected in this component. c) Unrestricted net position — All other assets that do not meet the definition of "restricted" or "net investment in capital assets." M. FUND BALANCE 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% - 50% of the annual operating budget. (33) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) N. 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 position 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 position 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, 2012 is $2,611,291 and $2,625,179, respectively, and were entirely covered by federal depository insurance or by surety bonds and collateral in accordance with Minnesota Statutes. (34) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 3 CAPITAL ASSETS Capital asset activity for the year ended December 31, 2012 was as follows: Beginning Ending Balance Additions Disposals Transfers Balance Governmental Activities: Capital Assets Not Being Depreciated: Land $ 487,735 $ - $ - $ - $ 487,735 Construction in Progress 111,852 - - (111,852) - Total Capital Assets Not Being Depreciated 599,587 - - (111,852) 487,735 Capital Assets Being Depreciated: Buildings 2,232,670 - - - 2,232,670 Equipment 365,422 146,958 - 111,852 624,232 Vehicies 1,006,295 11,426 - - 1,017,721 Infrastructure 9,359,242 - - (85,473) 9,273,769 Other Improvements 162,647 - - - 162,647 Total Capital Assets,Being Depreciated 13,126,276 158,384 - 26,379 13,311,039 Accumulated Depreciation for: Buildings (712,584) (48,261) - - (760,845) Equipment (225,565) (56,928) - - (282,493) Vehicles (576,678) (49,527) - - (626,205) Infrastructure (2,734,877) (236,084) - 29,061 (2,941,900) Other Improvements (75,013) (6,894) - - (81,907) Total Accumulated Depreciation (4,324,717) (397,694) - 29,061 (4,693,350) Total Capitai Assets,Being Depreciated,Net 8,801,559 (239,310) - 55,440 8,617,689 Governmental Activities Capital Assets,Net $ 9,401,146 $ (239,310) $ - $ (56,412) $ 9,105,424 Beginning Ending Balance Additions Disposais Transfers Balance Business-Type Activities: Capital Assets Being Depreciated: Sewer Plant $ 1,500,000 $ - $ - $ - $ �,500,000 Uptown Sewer - 158,354 - 85,473 243,827 Total Capital Assets Being Depreciated 1,500,000 158,354 - 85,473 1,743,827 Less:Accumulated Depreciation (660,000) (34,876) - (29,061) (723,937) Net Capital Assets-Sewer Utility $ 840,000 $ 123,478 $ - $ 56,412 $ 1,019,890 Depreciation was charged to City functions as follows: General Government $ 15,760 Public Safety 45,291 Public Works 324,402 Parks and Recreation 12,241 Total Depreciation-Governmental Activities $ 397,694 (35) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 4 CITY INDEBTEDNESS City indebtedness at December 31, 2012 is composed of the following: Final Issue Maturity Interest Original Balance Date Date Rate Issue 12/31/12 Governmental Activities: General Obligation Debt: 2005 Building Crossover Bonds 5/1/2005 12/1/2015 3.35-4.2% $ 685,000 $ 315,000 2007 Improvement Bonds 5/1/2007 12/1/2017 3.65-4.1% 1,430,000 640,000 2010 Equipment Certificate 7/15/2010 2/1/2016 2.22-3.55% 200,000 160,000 2011 Equipment Certificate 6/30/2011 12/1/2016 2.75%-3.95% 150,000 120,000 Total Long-Term Debt 2,465,000 1,235,000 Unamortized Bond Discount (43,090) (19,063) Compensated Absences N/A 15,016 Total $ 2,421,910 $ 1,230,953 The following is a schedule of changes in City indebtedness for the year ended December 31, 2012: Amounts Balance Balance Due Within 1/1/12 Issued Retired 12/31/12 One Year Long-Term Debt: Governmental Activities: General Obligation Notes $ 1,540,000 $ - $ (305,000) $ 1,235,000 $ 305,000 Unamortized Bond Discount (23,308) - 4,245 (19,063) - Compensated Absences 19,090 22,071 (26,145) 15,016 12,355 TotalLong-Term Debt $ 1,535,782 $ 22,071 $ (326,900) $ 1,230,953 $ 317,355 All long-term bonded indebtedness outstanding at December 31, 2012 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. (36) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 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 125,000 5,125 130,125 Total 1,235,000 124,483 �1,359,483 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 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. (37) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 5 DEFINED BENEFIT PENSION PLANS — STATEWIDE (CONTINUED) A. 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% 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 available 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 available 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. (38) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 5 DEFINED BENEFIT PENSION PLANS— STATEWIDE (CONTINUED) B. FUNDING POLICY Minnesota Statutes, Chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the state legislature. 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 2012. The City is required to contribute the following percentages of annual covered payroll: 11.78% 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, 2012, 2011, and 2010 were $20,284, $21,169, and $20,298, 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 plan 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 2012 were $824. (39) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 will 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 all 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 municipalities. 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. �ao) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 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 2012 were as follows: City Contributions $ 21,986 State Aid 18,258 Total $ 40,244 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 2012 were $116,863. Fire Department Services Agreement— 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 2012 and 2011 were $33,551 and $32,574, respectively. The Township will pay the City $34,558 for 2013. (41) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 NOTE 9 INTERFUND Individual fund transfers for fiscal year 2012 are as follows: Transfer Transfer In Out Governmental Activity: General Capital Assets $ - $ 56,412 General Fund 4,569 80,000 Equipment Replacement 80,000 - Non-Major Funds: Capital Improvement - 118,766 Business-Type Activity: Sewer - 2,825 Uptown Sewer 175,178 1,744 $ 259,747 $ 259,747 During 2012, the City made routine transfers from the General Fund to the Equipment Replacement Fund and reimbursed the General Fund for work done on behalf of the 201 Sewer and Uptown Sewer Funds. $56,412 of uptown sewer infrastructure (net of accumulated depreciation) was transferred from Governmental Activities Capital Assets to the new Uptown Sewer enterprise fund effective January 1, 2012. Additionally, the cost of the Uptown Sewer Improvement Project was funded by the Capital Improvement Fund through an operating transfer of $118,766 and an interfund loan that represented 25% of the total cost of the project. The cost of this loan is to be recovered through an increased Uptown Sewer usage rate over the next 10 years, and will be repaid to the Capital Improvement fund over this period through annual payments of$2,639. Interfund Interfund Receivable Payable Governmental Activity: Capitallmprovement $ 39,588 $ - Business-Type Activity: Uptown Sewer - 39,588 39,5 ,5 (42) CITY OF SCANDIA, MINNESOTA NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2012 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 2012 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 90 days written notice to the board and all providers of the program. (43) 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, 2012 Budgeted Amounts Actual Variance with Original Final Amounts Final Budget REVENUES Property Taxes $ 1,596,008 $ 1,596,008 $ 1,601,201 $ 5,193 Intergovernmental: State Aid Credits 13,062 13,062 42,569 29,507 Recycling Grant 7,235 7,235 7,235 - Other Grants 5,000 5,000 1,395 (3,605) Total Intergovernmentai Revenues 25,297 25,297 51,199 25,902 Licenses and Permits 53,830 53,830 54,657 827 Fines and Forfeits 19,000 19,000 17,818 (1,182) Charges for Services: Zoning and Hearing Fees 88,370 88,370 193,396 105,026 Fire Protection 33,551 33,551 33,551 - Cable Franchise 6,800 6,800 7,223 423 Total Charges for Services 128,721 128,721 234,170 105,449 Miscellaneous: Interest 10,174 10,174 7,023 (3,151) Donations and Other 3,650 3,650 28,889 25,239 Total Miscellaneous 13,824 13,824 35,912 22,088 Total Revenues 1,836,680 1,836,680 1,994,957 158,277 EXPENDITURES General Government: Administration and Finance 356,686 363,986 389,764 25,778 City Council 18,839 17,839 17,949 110 Elections 5,370 5,370 6,035 665 Planning and Building 149,058 149,058 295,217 146,159 CapitalOutlay 2,500 2,500 1,946 (554) Total General Government 532,453 538,753 710,911 172,158 Public Safety: Police 117,060 116,560 117,172 612 Fire 245,839 242,339 221,059 (21,280) CapitalOutlay 5,000 9,000 8,980 (20) Total Public Safety 367,899 367,899 347,211 (20,688) (44) CITY OF SCANDIA, MINNESOTA SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL (CONTINUED) GENERALFUND YEAR ENDED DECEMBER 31, 2012 Budgeted Amounts Actual Variance with Original Final Amounts Final Budget EXPENDITURES(CONTINUED) Public Works: Public Works $ 724,387 $ 701,211 $ 636,322 $ (64,889) CapitalOutlay 44,394 67,394 63,479 (3,915) Total Public Works 768,781 768,605 699,801 (68,804) Parks and Recreation: Parks 48,498 48,498 45,259 (3,239) Community Center 2,484 41,770 37,067 (4,703) CapitalOutlay 41,770 2,484 2,400 (84) Total Parks and Recreation 92,752 92,752 84,726 (8,026) Fixed and Other: Donations - 1,000 1,000 - Total Expenditures 1,761,885 1,769,009 1,843,649 74,640 Revenues in Excess of Expenditures 74,795 67,671 151,308 83,637 OTHER FINANCING SOURCES(USES) Transfers In 5,341 5,341 4,569 (772) Transfers Out (80,001) (80,001) (80,000) (1) Total Other Financing Uses (74,660) (74,660) (75,431) (773) NET CHANGE IN FUND BALANCE $ 135 $ (6,989) 75,877 $ 82,864 Fund Balance- Beginning of Year 1,253,676 FUND BALANCE-END OF YEAR $ 1,329,553 (45) CITY OF SCANDIA, MINNESOTA NOTES TO REQUIRED SUPPLEMENTARY INFORMATION YEAR ENDED DECEMBER 31, 2012 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 2012 as follows: Final Budget Actual Excess General Fund General Government: Administration and Finance $ 363,986 $ 389,764 $ (25,778) City Council 17,839 17,949 (110) Elections 5,370 6,035 (665) Planning and Building 149,058 295,217 (146,159) Public Safety: Police 116,560 117,172 (612) (46) COMBINING FUND FINANCIAL STATEMENTS CITY OF SCANDIA, MINNESOTA COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2012 Debt Service Capital Projects 2000 Park Total Fire Hall Equipment Capital Capital Nonmajor Bond Fund Certificates Improvement Improvement Funds ASSETS Cash and Investments $ 183,322 $ 44,599 $ 177,568 $ 9,406 $ 414,895 Taxes Receivable 6 - 2 - 8 Advance to other funds - - 39,588 - 39,588 Total Assets $ 183,328 $ 44,599 $ 217,158 $ 9,406 $ 454,491 LIABILITIES AND FUND BALANCES LIABILITIES Deferred Revenue $ 6 $ - $ 2 $ - $ 8 FUND BALANCES Nonspendable - - 39,588 - 39,588 Restricted for Debt Service 183,322 44,599 - - 227,921 Assigned for: Infrastructure Improvement Projects - - 177,568 - 177,568 Acquisition and Development of Parks - - - 9,406 9,406 Unassigned - - - - - Total Fund Balance 183,322 44,599 217,156 9,406 454,483 Total Liabilities and Fund Balances $ 183,328 $ 44,599 $ 217,158 $ 9,406 $ 454,491 (47) CITY OF SCANDIA, MINNESOTA COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE NONMAJOR GOVERNMENTAL FUNDS YEAR ENDED DECEMBER 31, 2012 Debt Service Capital Projects 2000 Park Total Fire Hall Equipment Capital Capital Nonmajor Bond Fund Certificates Improvement Improvement Funds REVENUES Taxes $ 120,822 $ 83,942 $ 107,611 $ - $ 312,375 Miscellaneous Revenues 707 171 906 44 1,828 Total Revenues 121,529 84,113 108,517 44 314,203 EXPENDITURES Debt Service: Principal Payments 100,000 70,000 - - 170,000 Interest Payments 16,675 12,532 - - 29,207 CapitalOutlay - - - 3,574 3,574 Total Expenditures 116,675 82,532 - 3,574 202,781 EXCESS(DEFICIENCY)OF REVENUES OVER(UNDER)EXPENDITURES 4,854 1,581 108,517 (3,530) 111,422 OTHER FINANCING USES Transfers Out - - (118,766) - (118,766) NET CHANGE IN FUND BALANCES 4,854 1,581 (10,249) (3,530) (7,344) Fund Balance-Beginning of Year 178,468 43,018 227,405 12,936 461,827 FUND BALANCE-END OF YEAR $ 183,322 $ 44,599 $ 217,156 $ 9,406 $ 454,483 (48) CITY OF SCANDIA, MINNESOTA STATEMENT OF CHANGES IN ASSETS AND LIABILITIES — FIDUCIARY FUND YEAR ENDED DECEMBER 31, 2012 Balance Balance January 1, December 31, 2012 Additions Deductions 2012 ASSETS CURRENT ASSETS Cash and Investments $ 117,788 $ 206.801 $ 152,242 $ 172,347 LIABILITIES CURRENT LIABILITIES Contractor Deposits $ 117,788 $ 206,801 $ 152,242 $ 172,347 (49) ni. OTHER REQUIRED REPORTS � . CliftonLarsonAllen LLP � www_diftonlarsonallen_oom CliftonLarsonAllen INDEPENDENT AUDITORS' REPORT ON MINNESOTA LEGAL COMPLIANCE Honorable Mayor and Members of the City Council and Citizens City of Scandia, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying 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, 2012, and the related notes to the financial statements, which collectively comprise the City's basic financial statements, and have issued our report thereon dated May 6, 2013. 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. In connection with our audit, nothing came to our attention that caused us to believe that the City failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City's noncompliance with the above-referenced provisions. The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this communication is not suitable for any other purpose. ���1,�L,�'� CliftonLarsonAllen LLP Minneapolis, Minnesota May 6, 2013 � MindependentmeirterotNexialMernational �J�� INTERNATIOI:AL . GiftonLarsonAllen LLP � www_difta�larsaiallen.can CliftonLarsonAllen INDEPENDENT AUDITORS' 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, in accordance with the auditing standards generally acceptd 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, 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, 2012, and the related notes to the financial statements, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 6, 2013. Internal Control Over Financial Reportinq In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opiion on the effectiveness of the City's internal control. Our consideration of the internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesse or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described below, we identified certain deficiencies in internal control 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. � n���,ee�n��m rw�im���i (51) INTERNATIONAL Honorable Mayor and Members of the City Council City of Scandia, Minnesota Limited Seqrectation 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, 24 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. (52) Honorable Mayor and Members of the City Council City of Scandia, Minnesota Manaaement 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 GAAP 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. Comqliance 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. The Citv's Response to Findinas 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. (53) Honorable Mayor and Members of the City Council City of Scandia, Minnesota Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. LL.� CliftonLarsonAllen LLP Minneapolis, Minnesota May 6, 2013 (54)