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Financial Analysis & Mgmt Considerations 1998 CITY OF FRIDLEY, MINNESOTA FINANCIAL ANALYSIS AND - MANAGEMENT CONSIDERATIONS DECEMBER 31, 1998 - a a a a a HLBTautges Redpath, Ltd. Certified Public Accountants and Consultants To the Honorable Mayor and Members of the City Council City of Fridley, Minnesota We have completed the 1998 audit of the City of Fridley and have issued our report thereon. Our Independent Auditor's Report is included in the City's Comprehensive Annual Financial Report. This Financial Analysis and Management Considerations Report is prepared to offer the City an independent review of: • Comparisons and trend analysis of financial results. • Benchmarking to State and National statistics and trends. • Available strategies to address long-term financial planning. • Systems. • Policies and procedures. • Outside factors influencing the City such as State funding and changes in fmancial accounting and reporting standards. — This report is intended to supplement the City's strategic planning efforts with our views on the financial position of the City and to discuss outside factors we believe will affect the City in fulfilling its mission. Following this introduction letter is an Executive Summary with page references to the areas discussed. Thank you for the opportunity to serve the City. We are available to discuss this report with you. June 18, 1999 _ *Ay 7; 47 HLB TAUTGES REDPATH,LTD. Certified Public Accountants 4810 White Bear Parkway, White Bear Lake, Minnesota 55110, USA Telephone: 651 426 7000 Fax: 651 426 5004 HLB Tautges Redpath,Ltd.is a member of ®International. A world-wide organization of accounting firms and business advisers. oma City of Fridley,Minnesota Financial Analysis and Management Considerations Executive Summary EXECUTIVE SUMMARY Throughout this report various topics are tagged for easier reference as follows: State statute or federal legislation. Financial comparison or trend analysis. GaS3 Impact of accounting and reporting standards of the Governmental Accounting Standards Board. <=' Options to continue improvement in policies, procedures, systems and/or long-range planning. O City's accomplishments. Several areas highlighted for your reference include the following: CA93 Beginning in 1998,the City is required to report investments at market value in the financial statements. Page 4 .r O The City's property tax collection rate was 99%for 1998. Page 6 The special assessment collection rate was 98%for 1998. Page 7 to Tax increment compliance reporting has been significantly increased. The Office of the State Auditor has increased efforts in monitoring tax increment activity. We are recommending cities review their "readiness" for a potential OSA TIF audit. Page 10 .. © The fund balance of the general fund increased by$472,186 during 1998 to a balance of$7,682,831 at December 31, 1998. Page 15 Page 2 City of Fridley,Minnesota Financial Analysis and Management Considerations Executive Summary ^ <=> The Chemical Assessment Team Fund has a fund deficit of$18,954 at December 31, 1998. The City has not funded its portion of this activity. We recommend the City provide a funding source for this activity. Page 19 The Special Assessment Debt Service Funds are in a strong financial position. Cash and pledged assets exceed debt by over$8 million at December 31, 1998. Page 21 -� ® The City was awarded the Certificate of Achievement for Excellence in Financial Reporting for its 1998 Comprehensive Annual Financial Page 34 Report(CAFR). GAB The Government Accounting Standards Board(GASB)has adopted a G'' new accounting standard relating to the Government Financial Reporting Model. This new accounting standard will represent the single largest change in financial reporting for cities. Page 35 Page 3 City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements COMBINED FINANCIAL STATEMENTS The combined fmancial statements of the City of Fridley are presented in Exhibits A-1 through A-5 of the 1998 Comprehensive Annual Financial Report. The following comments relate to the Combined Balance Sheet-All Funds (Exhibit A-1). Cash and Investments Cash and investment balances of Minnesota cities are commonly restricted by statutory requirements and long range financial planning objectives. The following schedule illustrates this point by presenting cash and investment balances by fund type: Cash and Investment Balances December 31, Increase Fund Type 1997 1998 (Decrease) General $6,785,988 $7,279,914 $493,926 Special Revenue 224,224 578,743 354,519 Debt Service 8,005,404 8,288,693 283,289 Capital Project 8,057,697 7,288,525 (769,172) Enterprise 6,724,596 9,259,058 2,534,462 Internal Service 3,796,275 3,824,797 28,522 Trust and Agency 41,633 45,565 3,932 F RA-in total 8,914,456 9,587,065 672,609 — $42,550,273 $46,152,360 $3,602,087 © Investment income totaled$2,541,872 in 1997 and$2,488,433 in 1998. Page 4 City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements GoS3 The Governmental Accounting Standards Board(GASB) issued an accounting standard on accounting and financial reporting for certain investments(GASB No. 31). This accounting standard requires investments to be reported at market value. The City implemented this new accounting standard in 1998. The market value adjustment was a$74,000 increase at December 31, 1998. Mortgage Receivable The City's Housing and Redevelopment Authority(HRA)has mortgages receivable which have been used to provide assistance to residents and developers. A summary of mortgages receivable is as follows: Balance Balance Description 1/1/98 Additions Deletions 12/31/98 Home Improvement Loan Program $1,975,450 $716,443 $367,100 $2,324,793 ACCAP 56,870 - 677 56,193 Shorewood 35,337 - 7,727 27,610 University Avenue Assoc. 484,779 - 484,779 Sheet Metal Connectors 134,080 - 11,968 122,112 Commercial Rail Property - 125,000 - 125,000 AGRO-K 74,569 - 2,659 71,910 Moore Lake Apartments 9,684 - 9,684 - Industrial Equities 146,861 3,672 7,215 143,318 Tamarisk 12,400 620 - 13,020 Total $2,930,030 $845,735 $891,809 $2,883,956 The Home Improvement Loan Program was started in 1996. This program is being funded in part by a$1.5 million loan to the HRA from the City made in 1997. Page 5 City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements Property Taxes Receivable Q A schedule of property tax activity for the past three years is as follows: 1996 1997 1998 Delinquent taxes-January 1 $84,303 $72,063 $120,437 Current levy 3,897,629 3,891,612 4,010,570 Total collectible 3,981,932 3,963,675 4,131,007 Collections 3,849,104 3,833,196 3,996,615 Less adjustment to County (60,765) (10,042) (51,282) Delinquent taxes-December 31 $72,063 $120,437 $83,110 Total collections as a percent of current levy 98.76% 98.49% 99.65% © As presented above,the City is experiencing a consistently solid collection rate for property taxes. Page 6 City of Fridley,Minnesota Financial Analysis and Management Considerations ■ Combined Financial Statements Special Assessments Receivable Special assessments receivable consisted of the following amounts at December 31, 1997 and 1998: December 31, Increase •�. 1997 1998 (Decrease) Delinquent $43,389 $26,272 ($17,117) Deferred 1,674,623 1,598,465 (76,158) .. Due from County 13,878 25,665 11,787 Totals $1,731,890 $1,650,402 ($81,488) © A history of the City's special assessment collection rate is as follows: Current Total Collections Collections as a Percent as a Percent Year of Current Levy of Current Levy 1990 94% 105% 1991 88% 92% 1992 92% 103% 1993 94% 105% 1994 93% 97% 1995 90% 92% 1996 95% 110% 1997 93% 102% 1998 92% 98% ® As shown above, the City continues to experience a solid special assessment collection rate. Page 7 "� City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements a Tax Increments A schedule of tax increment revenues by district is as follows: a Delinquent Delinquent District Balance 1998 1998 Balance No. Name 1/1/98 Levy Collections Adjustment 12/31/98 1 Center City(A-2,A-8) $16,526 $664,139 ($629,956) ($28,782) $21,927 _ 2 Moore Lake(A-5,A-9) 4,712 897,572 (655,608) (233,787) 12,889 3 North Area(B-2,B-3,D-3,D-5) 17,087 1,281,835 (1,268,621) (3,180) 27,121 4 Johnson/Skywood(B-9,C-1) (1) - - 1 - 5 Paschke(C-6) - - - - - 6 Lake Pointe(E-8) - - - - - 7 Winfield(G-3) 480 73,291 (72,988) (183) 600 8 Shorewood(G-4) - - - - - 9 Onan/Old Central(K-1) - - - - - "` 11 University/Osborne(L-6,L-7) - 31,348 (31,270) (78) - 12 McGlynn Bakery(L-9,M-1) 14 75,286 (75,098) (188) 14 13 Satellite Ln Apts(N-1) - 1,697 (1,622) (4) 71 14 North Park Business Ctr(N-6) - _ 91,041 (90,671) (227) 143 15 MN Comm Rail(P-7) - 2,945 (2,936) (9) - 16 57th Ave Replace - - - - - HR1 Housing Repl(0-4,0-5,0-6) 55 6,508 (5,881) (17) 665 Total $38,873 $3,125,662 ($2,834,651) ($266,454) $63,430 As shown above, the City has 17 tax increment districts. Reporting requirements recently implemented by the Office of the State Auditor(OSA)require reporting of tax increment activity by district. During 1997 and 1998 the City/HRA created a separate fund for each tax increment district to facilitate reporting requirements. a Page 8 City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements The 1995 legislature transferred the responsibility for State oversight of tax increment financing(reporting and compliance) from the Commissioner of Revenue to the Office of the State Auditor(OSA). The transfer of the responsibility was accompanied by a funding equal to one-tenth of one percent of tax increment revenues. The 1998 legislature subsequently increased the funding to .25 percent of tax increment revenues. Actions taken by the OSA since 1995 include the following: 1. Re-design of initial year annual reporting forms and modification of those forms in each subsequent reporting year. 2. Educational seminars. 3. "Desk review"procedures of annually submitted tax increment reporting forms. 4. Follow-up letter requesting clarification of amounts and information submitted on tax increment reporting forms. .., 5. Audits of certain districts which resulted in the issuance of audit reports specifying fmdings. -� The OSA's audit procedures include a detail review of transactions from the inception of a City's tax increment financing district. Several aspects of these audits should be anticipated by cities selected for audit including: Although the OSA does not charge the Authority(City, HRA, or EDA)to conduct the audit, a significant amount of City personnel time can be consumed in the process. Assembling of financial records and supporting documents from the inception of the district(often over 15 years). Responding to auditor inquiries and clarifying reporting practices. Page 9 City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements Reconciliation of reported amounts on TIF form with the City's published financial statements. Resurrect budgets and interpreting the amounts and language of the budgets for inclusion on reporting forms. Note that budgets were often prepared on a basis different from amended and reviewed OSA TIF reporting forms. Preparation of written responses to findings, if any. Potential legal response if the County attorney's office chooses to prosecute for OSA findings with which the City disagrees. — Audits focus on a number of compliance areas. The City should be prepared to respond to inquiries regarding a range of topics including: Documentation of expenditures ♦ Administrative • Other Pooling of revenue by"gap"districts (Districts certified in 1979 to 1982). • Commingling of TIF revenue with non-TIF revenue. Transfers and related authorization and reporting issues. • Potential overpayment of increment. • Budget specificity. Various other compliance areas related to District formation and subsequent administration. We are recommending that cities review their"readiness"for a potential OSA audit of TIF a. districts and, if appropriate,modify practices to assure compliance. Page 10 — City of Fridley,Minnesota Financial Analysis and Management Considerations Combined Financial Statements Bonded Debt The City has the following bond issues outstanding at December 31, 1998: Final Amount Maturity Bond Issue Outstanding Date Tax Increment Bonds: Refunding Bonds of 1985(HRA) $460,000 2/1/99 Temporary Bonds of 1995 - 11/1/98 Refunding Bonds of 1997 9,575,000 8/1/09 Refunding Bonds of 1998 4,185,000 2/1/12 —. Subtotal 14,220,000 Special Assessment Bonds: Bonds of 1991 420,000 2/1/05 Bonds of 1992 465,000 2/1/04 Bonds of 1994 120,000 2/1/05 Bonds of 1996 285,000 2/1/12 Subtotal 1,290,000 Water Revenue Bonds: Bonds of 1991 1,270,000 2/1/11 Bonds of 1992 435,000 2/1/07 Bonds of 1994 65,000 2/1/05 Bonds of 1996A 1,685,000 2/1/12 Refunding Bonds of 1998 1,180,000 2/1/11 Subtotal 4,635,000 Sewer Revenue Bonds: Bonds of 1994 60,000 2/1/05 Storm Water Bonds: Bonds of 1994 135,000 2/1/05 Bonds of 1996A 795,000 2/1/12 Subtotal 930,000 Total $21,135,000 .. The tax increment bond issues will be repaid by increments generated by the City's tax increment districts. The special assessment bond issues will be repaid by future assessment collections. Page 11 —" City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund GENERAL FUND The general fund of the City is maintained to account for the current operating and capital outlay expenditures common to all cities. These basic services include(but are not limited to) public safety,public works,recreation and general government. r State Aids Property Taxes All Other Revenue Total Revenue Year Amount Percent Amount Percent Amount Percent Amount Percent 1990 $3,046,855 37% $3,552,142 43% $1,698,678 20% $8,297,675 100% 1991 2,811,986 33% 3,704,876 44% 1,932,026 23% 8,448,888 100% 1992 3,028,191 35% 3,590,062 42% 1,943,903 23% 8,562,156 100% 1993 3,021,934 35% 3,667,991 42% 1,994,184 23% 8,684,109 100% 1994 3,097,854 35% 3,529,356 40% 2,119,458 25% 8,746,668 100% 1995 3,163,242 35% 3,650,088 41% 2,128,788 24% 8,942,118 100% 1996 3,206,581 33% 3,803,136 40% 2,585,870 27% 9,595,587 100% 1997 3,372,274 34% 3,765,946 38% 2,743,811 28% 9,882,031 100% 1998 3,357,217 33% 4,007,547 40% 2,759,498 27% 10,124,262 100% a State aids for the general fund have consisted of the following amounts from 1990 through 1998: Local Total Government Other State Increase Percent Year Aid HACA State Aid Revenue (Decrease) Change 1990 $1,740,569 $846,304 $459,982 $3,046,855 1991 1,506,376 856,066 449,544 2,811,986 ($234,869) (7.7%) 1992 1,604,858 953,473 469,860 3,028,191 216,205 7.7% ` 1993 1,523,365 1,023,565 475,004 3,021,934 (6,257) (0.2%) 1994 1,558,917 1,065,611 473,326 3,097,854 75,920 2.5% 1995 1,577,235 1,076,582 509,425 3,163,242 65,388 2.1% -.. 1996 1,625,082 1,033,435 548,064 3,206,581 43,339 1.4% 1997 1,643,908 1,048,338 680,028 3,372,274 165,693 5.2% 1998 1,677,068 1,048,920 631,229 3,357,217 (15,057) (0.4%) ... —. Page 12 — City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund A graph of the 1998 revenue is as follows: General Fund Revenues o Fines and Licenses and Permits 7.0/o forfeits 2.0% 1998 Investment ..� Intergovernmental 33 7% income 3.7%% Charges for services 12.0% P �1 All Other 2.0% Property Taxes 39.6% Detail of the 1997 and 1998 revenue is presented in Exhibit B-3 of the 1998 Comprehensive Annual Financial Report. r Page 13 City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund A graph of 1998 expenditures is as follows: a 1998 Expenditures Recreation and Naturalist 8.9% Capital Outlay 3.2% Public Safety 40.3% General Government 16.9% �► Community Development 10 6.5% Municipal Center 2.0% Public Works 22 1% Detail of the 1998 expenditures is presented in Exhibit B-4 of the Comprehensive Annual Financial Report. Page 14 City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund © The fund balance of the general fund increased by$472,186 in 1998 as follows: Favorable •-, (Unfavorable) Variance Budgeted decrease in fund balance ($276,192) Revenue: General property taxes and assessments $120,882 Licenses and permits 96,248 Intergovernmental 78,697 Charges for services 69,050 Fines and forfeits 15,365 Investment income 14,621 Miscellaneous 44,696 439,559 Expenditures: General government 102,564 •, Public safety 53,676 Municipal center - Public works 86,892 Community development 14,157 Recreation and naturalist 27,776 Capital outlay 12,879 Sale of fixed assets 10,875 308,819 V` Net increase in fund balance $472,186 Page 15 City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund The City's December 31, 1998 general fund balance totaled $7.68 million. The City's general fund balance has been as follows for the past seven years: a $9,000,000 $8,000,000 $7,000,000 $6,000,000 II $5,000,000 $4,000,000 $3,000,000 $2,000,000 • $1,000,000 •$0 1991 1992 1993 1994 1995 1996 1997 1998 a a a Page 16 r City of Fridley,Minnesota Financial Analysis and Management Considerations General Fund The fund balance at December 31, 1998 have been reserved or designated as follows: General Fund r. Fund Balance Designations Designation Amount Long-term receivables $102,304 Encumbrances 20,314 Inventory 46,803 Working capital 4,064,726 Contingencies 1,107,494 Fixed asset replacement 1,164,684 Subsequent years expenditures 886,782 Total reserved/designated $7,393,107 Working Capital Reserve As previously noted, approximately 75% of the general fund's revenue sources are from property taxes and state aids. These revenue sources are not received until the second half of the fiscal year. As such, a working capital reserve at December 31 is required to finance operations for the first six months of the year. For the City of Fridley,the required working capital reserve is computed as follows: 1999 local government aid $1,684,587 1999 property tax levy(includes HACA) 5,089,957 Total $6,774,544 Required working capital reserve (sixty percent of total) $4,064,726 Page 17 City of Fridley,Minnesota Financial Analysis and .,, Management Considerations General Fund Other Reserves The following graph of monthly general fund cash fund balances illustrates the impact of receiving property taxes and state aids in the second half of the year: • The designation for contingencies is an amount equal to 10%of the ensuing year's budgeted expenditures. • The designation for subsequent year's expenditures is the amount of fund balance needed to balance the ensuing years budget. • The designation for fixed asset replacement is an amount equal to 10%of the general fund's investment in general fixed assets. A summary of the purposes of general fund reserve balances is as follows: Cash Flow .. Timing Difference Intergovernmental Capital Outlay Revenue Cutbacks` - Replacement Emergency or Special Projects Unanticipated Expenditures a Page 18 City of Fridley,Minnesota Financial Analysis and Management Considerations Special Revenue Funds SPECIAL REVENUE FUNDS The financial statements of the special revenue funds are presented in Exhibits C-1 through C-18 of the 1998 Comprehensive Annual Financial Report. Special revenue funds are a classification of funds to account for revenues (and expenditures related thereto) segregated by City policy or Federal or State Statutes for specific purposes. The City maintained eight special revenue funds during 1998 as follows: Fund Balance December 31, Increase Fund 1997 1998 (Decrease) Cable TV $86,130 $175,560 $89,430 Grant Management 10,609 22,083 11,474 HRA Reimbursement 235 - (235) Solid Waste Abatement (7,118) (24,685) (17,567) Drug and Gambling Forfeiture 10,853 13,974 3,121 Housing Revitalization (48,180) 189,749 237,929 Chemical Assessment Team (15,499) (18,954) (3,455) F.C.C.donations 139,859 98,919 (40,940) Totals $176,889 $456,646 $279,757 Chemical Assessment Team This fund was established in 1996 to account for a four city chemical spill team. The deficit in this fund is the result of the City not transferring to this fund its share of the funding of this activity. We recommend the City make the required transfer in 1999. Page 19 �" — City of Fridley,Minnesota Financial Analysis and Management Considerations Debt Service Funds DEBT SERVICE FUNDS The combining financial statements for the debt service funds are presented in Exhibits D-1 and D-2 of the 1998 Comprehensive Annual Financial Report. Debt service funds are a type of — governmental fund to account for the accumulation of resources for the payment of interest and principal on debt(other than enterprise fund debt). The diverse nature of the type of debt included in the same fund type requires careful analysis to determine the adequacy of the fund balance and projected fund balance. The following schedule extracts information from several sections of the 1998 Comprehensive -- Annual Financial Report to assist in this analysis. December 31, 1998 Scheduled Final Fund Fund Deferred Outstanding Property Maturity .. Description Balance Revenues Total Debt Taxes Date Tax Increment Debt: TI refunding bonds of 1985(HRA) $ - $460,000 * 2/1/99 ... TI temporary bonds of 1998 - 4,185,000 * 2/1/12 TI refunding bonds of 1997 - 9,575,000 * 8/1/09 Total tax increment debt 0 0 0 14,220,000 0 Special Assessment Debt: Closed Bond Fund 8,854,510 182,668 9,037,178 - - Special assessment bonds of 1991 337,817 264,996 602,813 420,000 - 2/1/05 . Special assessment bonds of 1992 147,306 218,963 366,269 465,000 - 2/1/04 Special assessment bonds of 1994 24,898 43,650 68,548 120,000 - 2/1/05 Special assessment bonds of 1996 210,690 223,579 434,269 285,000 - 2/1/12 Improvement Bonds of Future 58,310 52,557 110,867 - - N/A Total special assessment debt 9,633,531 986,413 10,619,944 1,290,000 0 Totals-All Debt Service Funds $9,633,531 $986,413 $10,619,944 $15,510,000 $0 *Tax increment collections are subject to future valuations within the District. **Excludes HRA pass through fund. Page 20 City of Fridley,Minnesota Financial Analysis and Management Considerations Debt Service Funds The preceding schedule indicates that the special assessment supported debt of the City is in strong financial position. Cash and pledged assets exceed debt by over$8 million at December 31, 1998. Closed Bond Fund The Closed Bond Fund has a balance available of approximately$9 million. The City currently has an informal policy regarding the use of this fund. This informal policy provides for inflationary growth in fund balance. Additionally, interest earnings of this fund are used as supplemental financing of the General Fund. We recommend the City consider establishing a formal policy to govern the intended use of this fund. The policy may designate the balance for: • Temporary funding of other debt service fund deficits, (if any). • Supplemental financing of construction deficits. • Full financing of minor construction projects. • Supplemental financing of replacement of systems (water and sewer) which had been -. previously assessed. • Long-term capital improvement program financing. Page 21 "'� City of Fridley,Minnesota Financial Analysis and Management Considerations Capital Project Funds CAPITAL PROJECT FUNDS The financial statements for the capital project funds are presented in Exhibits E-1 and E-2 of the 1998 Comprehensive Annual Financial Report. The fund balances (deficits)of the capital project funds were as follows at December 31, 1997 and 1998: Fund Balance(Deficit) December 31, Increase Fund 1997 1998 (Decrease) Capital Improvements $8,344,486 $8,221,750 ($122,736) Special Assessments (258,850) (1,434,668) (1,175,818) Totals $8,085,636 $6,787,082 ($1,298,554) Capital Improvements The Capital Improvements Fund accounts for improvement projects which are funded by: • General obligation bond issues • MSA Construction allotments • Property taxes • Donations and other miscellaneous sources Page 22 City of Fridley,Minnesota Financial Analysis and Management Considerations Capital Project Funds The City has designated the fund balance of this fund as follows: Designation Amount Encumbrances $1,208,913 Fixed asset replacement 1,450,313 .. Park improvements 388,874 Street improvements 5,173,650 Total $8,221,750 Financial activity for the past three years of the capital improvements fund is as follows: 1996 1997 1998 rr Fund balance -January 1 $8,484,922 $8,464,233 $8,344,486 Revenues and other sources: Property taxes and special assessments 73,887 74,134 74,919 Investment income 481,713 412,017 378,115 .r Intergovernmental revenue 492,278 682,733 1,685,763 Donations and other 62,478 32,440 21,673 Transfer from Special Assessment Debt Service Func - 1,556,888 - Total revenues and other sources 1,110,356 2,758,212 2,160,470 Expenditures and other uses: Public works 41,933 81,454 41,166 Capital outlay 378,267 1,989,693 847,913 Transfer to Special Assessment Capital Project Fund 710,845 805,889 1,394,127 Transfer to Storm Sewer Fund - 923 - Total expenditures 1,131,045 2,877,959 2,283,206 Fund balance -December 31 $8,464,233 $8,344,486 $8,221,750 Page 23 City of Fridley,Minnesota Financial Analysis and Management Considerations Capital Project Funds Special Assessments This fund accounts for assessable construction projects. The City maintains separate sub- funds for each bond issue or project grouping. At December 31, 1998 this fund had a deficit of$1,434,668. The December 31, 1998 deficit consists of the following sub-funds: Fund Balance Sub-Fund Project (Deficit) 351 Revolving $142,621 501 Curb Construction (2,861) 503 Driveway Construction (21,019) 553 1994 Streets 13,988 554 1995 Streets (11,526) 555 1996 Streets 237,708 556 1997 Streets (88,884) 557 1998 Streets (1,701,405) 558 1999 Streets (3,290) Total ($1,434,668) -- The above deficit in the 1998 Street fund will be financed by a future bond issue. Page 24 i City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds ENTERPRISE OPERATING FUNDS The City maintains two enterprise operating funds. The financial statements for these funds ,..,,, are presented in Exhibits F-1 through F-9 of the 1998 Comprehensive Annual Financial Report. Water Operations A chart of income from operations is presented below: .. $2,000,000 - $2,000,000 Water Operations $1,800,000 $1,800,000 $1,600,000 ' $1,600,000 $1,400,000 - ' $1,400,000 $1,200,000 $1,200,000 _ ■-6.-( Operating Expenses $1,000,000 $1,000,000 —Water Revenue $800,000 $800,000 .._ $600,000 , $600,000 $400,000 ■ $400,000 � $200,000 $200,000 ME $0 1 $0 1995 1996 1997 1998 "` As shown above, the Water Fund produced a net income of$115,941 for 1998. Page 25 City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds Sewer Operations A chart of net income from operations is presented below: $5,000,000 $5,000,000 Sewer Operations .r $4,500,000 $4,500,000 $4,000,000 $4,000,000 =ft $3,500,000 $3,500,000 $3,000,000 $3,000,000 1 1 Other Operating Expenses $2,500,000 ' $2,500,000 MCES Expense Sewer Revenue $2,000,000 • $2,000,000 $1,500,000 ■ , $1,500,000 $1,000,000 • $1,000,000 $500,000 ■ $500,000 $0 w • $0 1995 1996 1997 1998 The increase in operating revenue relates to "flat rate" sales which were $522,000 in 1996 to $1,334,000 in 1997. The increase is due to ground water clean-up which will not be a continuing activity. Page 26 City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds Storm Water Operations The Storm Water Operations Fund is designed to accumulate resources for future storm water systems and/or improvements to existing systems. Operating expenses consist primarily of maintenance costs. A chart of net income from operations is presented below. Storm Water Operations $360,000 $360,000 $320,000 $320,000 ... $280,000 I $280,000 $240,000 $240,000 $200,000 $200,000 $160,000 $160,000 Operating Expenses —Operating Revenue $120,000 — $120,000 $80,000 $80,000 $40,000 $40,000 $0 . $0 "► 1995 1996 1997 1998 Page 27 '`a City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds Municipal Liquor Fund The City has two retail liquor operations(off-sale). A summary of operations for the past three years is as follows: 1996 1997 1998 Amount Percent Amount Percent Amount Percent Sales $3,071,737 100.0% $3,079,567 100.0% $3,219,049 100.0% Cost of sales 2,424,824 78.9% 2,440,954 79.3% 2,555,072 79.4% Gross profit 646,913 21.1% 638,613 20.7% 663,977 20.6% Operating expenses: Personal services 284,482 9.3% 283,271 9.2% 292,783 9.1% Supplies and other charges 200,810 6.5% 148,778 4.8% 168,775 5.2% Depreciation 18,386 0.6% 27,803 0.9% 18,665 0.6% Total operating expense 503,678 16.4% 459,852 14.9% 480,223 14.9% Operating income $143,235 4.7% $178,761 5.8% $183,754 5.7% a Page 28 City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds A graph of net income from operations for the past four years is as follows: $3,500,000 .�. Liquor Fund $3,000,000 MI- $2,500,000 Administrative&Overhead $2,000,000 EMI Selling Expense Cost of Sales $1,500,000 --A—Sales � i. ��';:' ' _ —.. --- — $1,000,000 $500,000 $0 — 1995 1996 1997 1998 Comparison With Other Municipal Liquor Stores .. The Office of the State Auditor(OSA) annually publishes "An Analysis of Minnesota Municipal Liquor Store Operations. " The most recent report available is for 1996. The following analysis compares Fridley's liquor operations with those reported in the OSA report. There are twenty-one metro area cities that operate liquor operations. The City of Fridley ranks eighth in highest sales among metro area cities. It should be noted that the following comparisons are strictly a comparison of amounts reported. There are a number of factors that affect operating results that are not included in this comparison. These factors include the mix of product sold and philosophy regarding sales techniques such as high volume/lower margin. Page 29 City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds Gross Margin Analysis The gross margin of the liquor operations has averaged 20.8%over the past three years. Gross margin measures the sales less the direct cost of products sold. A comparison to state averages for Minnesota municipal off-sale operations is as follows: Cost Gross Margin State Sales of Sales Amount Percent Average 1996 $3,071,737 $2,424,824 $646,913 21.1% 23.8% .� 1997 3,079,566 2,440,954 638,612 20.7% Not Available 1998 3,219,049 2,555,072 663,977 20.6% Not Available WSource: Minnesota Office of the State Auditor-Metropolitan Area Off-Sale Operations Operating Expenses Operating expenses for the past three years have been as follows: Percent of Sales Year Amount City State Avg. 1996 $503,678 16.4% 15.6% 1997 459,852 14.9% N/A 1998 480,223 14.9% N/A As shown above, operating expenses as a percent of sales have been decreasing over the last three years. h ti Page 30 +c. City of Fridley,Minnesota Financial Analysis and Management Considerations Enterprise Operating Funds Operating Income Operating income for the past three years is as follows: Amount Percent of Sales State State Year City Average City Average 1996 $143,235 Not Available 4.7% 8.2% 1997 178,761 Not Available 5.8% Not Available 1998 183,754 Not Available 5.7% Not Available elk .m. Page 31 '^ City of Fridley,Minnesota Financial Analysis and Management Considerations Housing and Redevelopment Authority HOUSING AND REDEVELOPMENT AUTHORITY Financial reporting standards require a City's Comprehensive Annual Financial Report to include all component units of the City. The definition of a component unit is"a legally separate organization for which the elected -� officials of the primary government [City of Fridley] are fmancially accountable." The Housing and Redevelopment Authority(HRA) is considered a component unit of the City for fmancial reporting purposes. The method of including a component unit is dependent on the corporate structure of the component unit. Prior to 1996,the financial activity of the HRA was presented as a"blended" component unit. In other words, the funds of the HRA were treated as if they were City funds. However, upon further review, it has been determined the activity of the HRA should be presented as a"discrete" component unit. With this method,the activity is reported separately from all other City funds. Detail of the funds included in the HRA is presented in the separate HRA financial statements. Page 32 aft City of Fridley,Minnesota Financial Analysis and Management Considerations Internal Control Matters INTERNAL CONTROL MATTERS We will issue separate internal control reports as part of the 1998 federal single audit. However, we did notice other matters we wish to bring to your attention as follows: Grant Accounting and Grant Management Fund Certain grant documents and fmancial reports are prepared outside the finance department. .. Audit procedures disclosed that certain grant reimbursement reports were prepared incorrectly. We recommend the City consider having all grant reimbursement requests reviewed by the .. finance department to ensure proper accounting. The Grant Management Fund had a fund balance of$22,083 at December 31, 1998. The fund balance is most likely the result of not matching grant revenues with grant expenditures. In other words, certain grant expenditures are reported in other funds. OMNI Aft Page 33 City of Fridley,Minnesota Financial Analysis and Management Considerations Certificate of Achievement in Excellence CERTIFICATE OF ACHIEVEMENT IN EXCELLENCE The City submits the Comprehensive Annual Financial Report to the Government Finance Officers Association of the United States and Canada(GFOA) for a comprehensive review. The program is a review of all facets of financial reporting including disclosure, clarity and consistency with national reporting standards. The City received the award for the past 16 years. We commend the City for this achievement. Page 34 City of Fridley,Minnesota Financial Analysis and Management Considerations A Governmental Accounting Standards Update GOVERNMENTAL ACCOUNTING STANDARDS UPDATE Recently Adopted Accounting Standards GoeB The Governmental Accounting Standards Board(GASB)has adopted a new accounting standard relating to the Governmental Financial Reporting Model. This new standard requires significant changes in governmental accounting which will impact internal financial accounting and external financial reporting of the City. A summary of the key provisions of the document is presented below: • Fund Perspective Financial Statements. These financial statements would be similar to current financial statements with modified accrual basis of accounting for governmental funds, accrual basis of accounting for business type activities (formerly enterprise and internal service funds). However,the GASB proposes a new definition for fiduciary funds and the elimination of the account groups. • Entity-wide Perspective Financial Statements. These financial statements include full accrual accounting for all activities. The income statement will be replaced by a statement of activities using the net program cost format. Additionally, capital use charges (depreciation) on general fixed assets and infrastructure assets will be required to be reported in the financial statements. This new accounting standard is effective for 2003. Page 35 APPENDIX A CITY OF FRIDLEY, MINNESOTA YEAR& STATUTE REFERENCE STATE LEGISLATIVE ACTION 1998 #11 Data Privacy: Effective July 1, 1998, data,notes and preliminary drafts of audit reports created, collected and maintained by cities relating to internal audit or investigation remain confidential or protected nonpublic data until final audit report published or audit or investigation concluded. 1998 #10 Property Tax Reform: Cities are authorized to create special taxing districts within tax increment financing districts to address impacts of 1997 and 1998 property tax class rate changes on existing TIF districts. 1998 #9 TIF Deadlines: Beginning in 1999, annual TIF reporting deadline is extended from July 1 to August 1. Also, if annual reports are not submitted by the third Tuesday in November, State Auditor may place a hold on tax increment distributions. For distributions made between the third Friday in November and the end of the year, 25%will be withheld, and for distributions made after January 1, 100%will be withheld. 1998 #8 Miscellaneous TIF: a. Parcels classified as green acres, open space or ag preserves can now be included in certain TIF districts. b. The terms "decertify"and"decertification" are clarified to refer to termination of a district. c. Clarifies disclosure and reporting requirements for when the requirements begin and end. d. TIF recodification task force extended to May 1, 1999. 1998 #7 TIF Enforcement: The TIF revenues deduction rate increases from .10 to .25 percent to fund the Office of the State Auditor's enforcement responsibilities. This increase will be used to employ six auditors and one clerical support staff person. 1998 #6 Audit Results: Requires Auditors to present copy of audited financial statement and any management letter or written findings to each city council member and mayor no later than 30 days after report is due to state auditor. Audit results must be presented at a scheduled city council meeting prior to October 31 each year. PREPARED BY TAUTGES, REDPATH& CO.,Lm. PAGE 1 OF 4 APPENDIX A CITY OF FRIDLEY, MINNESOTA YEAR& STATUTE REFERENCE STATE LEGISLATIVE ACTION 1998 #5 Class Rates: 1998 tax bill continued class rate compression begun by 1997 tax bill. Examples of changes include the following: Homestead from 1% on first$75,000 plus 2% for amounts over$75,000 to 1% on first$75,000 plus 1.85% on amounts over$75,000. Sample Tax Capacity Differences Values Before After Amount Percent $70,000 $700 $700 $ - 0.00% 75,000 750 750 - 0.00% 100,000 1,213 1,175 (38) (3.09%) 150,000 2,138 2,025 (113) (5.26%) 200,000 3,063 2,875 (188) (6.12%) 500,000 8,613 7,975 (638) (7.40%) 750,000 13,238 12,225 (1,013) (7.65%) 1,000,000 17,863 16,475 (1,388) (7.77%) Commercial Industrial from 2.7% on first $150,000 plus 4.0%on amounts over - $150,000 to 2.45%on first$150,000 plus 3.5%on amounts over$150,000. Sample Tax Capacity Differences -s Values Before After Amount Percent $50,000 $1,350 $1,225 ($125) (9.26%) 100,000 2,700 2,450 (250) (9.26%) 150,000 4,050 3,675 (375) (9.26%) 200,000 6,050 5,425 (625) (10.33%) 500,000 18,050 15,925 (2,125) (11.77%) 750,000 28,050 24,675 (3,375) (12.03%) 1,000,000 38,050 33,425 (4,625) (12.16%) 10,000,000 398,050 348,425 (49,625) (12.47%) 1998 #4 State Aid: In addition to current annual inflationary increase in LGA, cities will receive $3 million a year of new LGA. Jurisdictions in metropolitan area will .� also receive increases in HACA in year 2000 to partially offset decrease in fiscal disparities pool due to class rate compression. PREPARED BY TAUTGES, REDPATH& CO., LTD. PAGE 2 OF 4 "" APPENDIX A CITY OF FRIDLEY, MINNESOTA YEAR& STATUTE REFERENCE STATE LEGISLATIVE ACTION 1997 #3 Levy Limits: Levy limits imposed on all counties and cities with greater than 2,500 population. Debt and other special levies are exempt for 1998 the limit is calculated as follows: + Levy(net of debt and other special levies) + Add 1997 HACA,LGA and LPA = Revenue base x 102.24%(inflation -- x 1996 household divided by 1995 households(not less than 1) - Subtract 1998 HACA,LGA and LPA = Pay 1998 levy limit 1997 #2 Class Rates: Changed class rates for calculating tax capacities. Examples of changes include the following: Residential Homestead from 1% on first$72,000 plus 2%for amounts over $72,000 to 1%on first$75,000 plus 1.85%on amounts over$75,000. Sample Tax Capacity Differences Values Before After Amount Percent $70,000 $700 $700 $ - 0.00% 75,000 780 750 (30) (3.85%) 100,000 1,280 1,213 (67) (5.27%) 150,000 2,280 2,138 (142) (6.25%) 200,000 3,280 3,063 (217) (6.63%) 500,000 9,280 8,613 (667) (7.19%) 750,000 14,280 13,238 (1,042) (7.30%) 1,000,000 19,280 17,863 (1,417) (7.35%) Market Rate Apartments from 3.4%to 2.9%. The small cities rate remained unchanged at 2.3%. Sample Tax Capacity Differences Values Before After Amount Percent $200,000 $6,800 $5,800 ($1,000) (14.71%) 500,000 17,000 14,500 (2,500) (14.71%) '- 1,000,000 34,000 29,000 (5,000) (14.71%) 5,000,000 102,000 87,000 (15,000) (14.71%) PREPARED BY TAUTGES, REDPATH& CO., LTD. PAGE 3 OF 4 APPENDIX A CITY OF FRIDLEY, MINNESOTA YEAR& STATUTE _ REFERENCE STATE LEGISLATIVE ACTION Commercial Industrial from 3% on first$100,000 plus 4.6% on amounts over $100,000 to 2.7%on first $150,000 plus 4%on amounts over$150. Sample Tax Capacity Differences Values Before After Amount Percent a $50,000 $1,500 $1,350 ($150) (10.00%) 100,000 3,000 2,700 (300) (10.00%) 150,000 5,300 4,050 (1,250) (23.58%) 200,000 7,600 6,050 (1,550) (20.39%) 500,000 21,400 18,050 (3,350) (15.65%) 750,000 32,900 28,050 (4,850) (14.74%) 1,000,000 44,400 38,050 (6,350) (14.30%) 10,000,000 458,400 398,050 (60,350) (13.17%) 1997 #1 Local Performance Aid: Local performance aid amounts must be spent on programs which have measurement criteria in place. P PREPARED BY TAUTGES, REDPATH& CO., LTD. PAGE 4 OF 4