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City of Centerville June 3, 2009 Page 6 Other Matters The following are areas that came to our attention during the audit that we feel should be reviewed: Financial Position and Results of Operations Our principal observations and recormnendations are smnmarized on the following pages. These recormnendations resulted from our observations made in connection with our audit of the City's financial statements for the year ended December 31, 2008. General Fund The General fund is used to account for resources traditionally associated with goverrunent, which are not required legally or by sound principal management to be accounted for in another fund. The General fund balance decreased $277,648 from 2007. The fund balance of $1,157,516 is 44 percent of the 2009 budgeted expenditures. The total General fund budget is $2,604,320 for 2009. We recormnend the fund balance be maintained at a level sufficient to fund operations until the major revenue sources are received in June. We feel a reserve of approximately 40 to 50 percent of planned expenditures and transfers out is adequate to meet working capital and small emergency needs. At the current level, the fund balance is at the range of what is generally recormnended as a minimmn. Minnesota cities must maintain substantial amounts of fund balance in order to meet their liquidity and working capital needs as an operating entity. That is because a substantial portion of revenue sources (taxes and intergovernmental revenues) are received in the last two months of each six-month cycle. The Office of the State Auditor (the OSA) has issued a Statement of Position relating to fund balance stating "a local goverrunent should identify fund balance separately between reserved and unreserved fund balance. The local goverrunent may assign and report some or all of the fund balance as designated and undesignated." We recormnend local governments adopt a formal policy on the level of unreserved fund balance that should be maintained in the general and special revenue funds. This helps address citizen concerns as to the use of fund balance and tax levels. Purposes and Benefits of an Adequate Fund Balance • Expenditures are incurred somewhat evenly throughout the year. However, currently, property tax and state aid revenues are not received until the second half of the year. An adequate fund balance will provide the cash flow required to finance the General fund expenditures until these revenue sources are received. • The City is vulnerable to legislative actions at the State and Federal level The State imposed reductions of market value credit aid and local government aid for some cities at the end of 2008 and more reductions are anticipated for 2009. Levy limits have also been implemented for municipalities in past legislative sessions. An adequate fund balance will provide a temporary buffer against those aid adjustments and levy limits. • Expenditures not anticipated at the time the annual budget was adopted may need irmnediate Council action. These would include capital outlay replacement, lawsuits and other items. An adequate fund balance will provide the financing needed for such expenditures. • A strong fund balance will assist the City in obtaining, maintaining or improving its bond rating. The result will be better interest rates in future bond sales. 952.835.9090 Fax 952.835.326t www:aemcpas.cosn