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HomeMy WebLinkAbout2020 Management Letter Management Report for City of Gem Lake, Minnesota December 31, 2020 THIS PAGE INTENTIONALLY LEFT BLANK To the City Council and Management City of Gem Lake, Minnesota We have prepared this management report in conjunction with our audit of the City of Gem Lake, Minnesota’s (the City) financial statements for the year ended December 31, 2020. We have organized this report into the following sections: •Audit Summary •Governmental Funds Overview •Enterprise Funds Overview •Government-Wide Financial Statements •Legislative Updates •Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. The purpose of this report is solely to provide those charged with governance of the City, management, and those who have responsibility for oversight of the financial reporting process comments resulting from our audit process and information relevant to city finances in Minnesota. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota June 22, 2021 C E R T I F I E D A C C O U N T A N T S P UBLIC PRINCIPALS Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA/CMA Jaclyn M. Huegel, CPA Kalen T. Karnowski, CPA Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 THIS PAGE INTENTIONALLY LEFT BLANK -1- AUDIT SUMMARY The following is a summary of our audit work, key conclusions, and other information that we consider important or that is required to be communicated to the City Council, administration, or those charged with governance of the City. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS We have audited the financial statements of the governmental activities, the business-type activities, and each major fund of the City as of and for the year ended December 31, 2020. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you verbally and in our audit engagement letter. Professional standards also require that we communicate the following information related to our audit. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously discussed and coordinated in order to obtain sufficient audit evidence and complete an effective audit. AUDIT OPINION AND FINDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2020: • We have issued an unmodified opinion on the City’s basic financial statements. • We reported one matter involving the City’s internal control over financial reporting that we considered to be a material weakness: 1. Due to the limited size of the City’s office staff, the City has limited segregation of duties in certain areas. • The results of our testing disclosed no instances of noncompliance required to be reported under Government Auditing Standards. • We reported three findings based on our testing of the City’s compliance with Minnesota laws and regulations: 1. Minnesota Statutes require the governing body of the City to annually delegate the authority to make electronic funds transfers to a designated business administrator or chief financial officer or the officer’s designee. The City did not complete this delegation for the year ended December 31, 2020. 2. Minnesota Statutes require payroll time sheet approval for employees. The time sheet for the City’s one employee did not contain a declaration indicating that the facts recited on the payroll are correct to the best of the employee’s information and belief. 3. Minnesota Statutes require unclaimed property held for more than three years (or one year for unpaid compensation) to be reported and paid or delivered to the state Commissioner of Commerce each year. This requirement was not met by the City for the curren t audit year. -2- FOLLOW-UP ON PRIOR YEAR FINDINGS AND RECOMMENDATIONS As a part of our audit of the City’s financial statements for the year ended December 31, 2020, we performed procedures to follow-up on the findings and recommendations that resulted from the prior year audit. The prior auditor reported the following findings that are no longer findings in the current year audit of the City: • The prior year audit reported that the City was not performing utility billing reconciliations to account for total billings and receipts into the City’s general ledger system. It also noted that the 4th quarter utility billing was not booked. This is not a finding in the current year. • The prior year audit reported there were several material audit adjustments that needed to be posted to the City’s general ledger in order to arrive at the correct year -end balances. There were no material adjustments made in the current year. OTHER OBSERVATIONS AND RECOMMENDATIONS Check Sequence During the audit of the current year, we noted during our testing that the Mayor was signing checks in advance in case she was absent or unavailable when checks need to be processed. We communicated to management of the City that this practice should be discontinued and the City Council should authorize another employee to sign checks in the Mayor’s absence. Electronic Funds Transfers Fraud As the use of electronic funds transfers and payment methods has become more prevalent, we have seen increases in both the incidences of fraud related to these transactions and the dollar amounts involved. Operational changes related to the COVID-19 pandemic, including greater reliance on technology and more employees working remotely, have tended to increase risk in this area. We urge cities to carefully review controls over these transactions, and consider best practices to address these risks, such as: • Ensuring segregation of duties over these transactions by involving more than one employee in the process. • Requiring multi-factor authentication of requests for electronic payments from new vendors or for changes in wiring instructions for existing vendors. It is recommended that changes for existing vendors be verified through trusted contact information used previously for that vendor, not as provided in the change request, to verify the accuracy of the change. • Educate employees on the controls in place to protect the organization’s financial assets and ensure management is supportive and accepting of the processes in place. Attempted fraudulent transactions are often initiated using the profile of a supervisor. Employees must be comfortable questioning unusual transactions or requests, and instructed not to circumvent internal control procedures regardless of whom they believe initiated the transaction. • Recommended cyber security measures, such as limiting network access and requiring robust passwords that are changed regularly, should be implemented and followed by all city employees, not just those directly involved with financial transactions. • Review insurance policies to understand the coverage provided for financial loss es due to cybersecurity risks and evaluate whether they provide adequate coverage based on management’s assessment of these risks. -3- Uniform Guidance Written Controls and Micro-Purchase Threshold Federal Uniform Guidance requires that nonfederal entities must have and use documented procurement procedures consistent with 2CFR § 200.317-320 for the acquisition of property or services required under a federal award or subaward. Effective August 31, 2020, the federal micro-purchase threshold, which is the threshold that allows for procurements without soliciting competitive price or rate quotations given certain conditions, was increased from $3,500 to $10,000 in the Federal Acquisition Regulations (FAR). Effective November 12, 2020, the Uniform Guidance was also revised to allow nonfederal entities to establish a micro-purchase threshold higher than the $10,000 threshold established in the FAR under certain circumstances. The nonfederal entity may self-certify a micro-purchase threshold up to $50,000 if the requirements in 2CFR § 200.320(a)(1)(iv) are followed. Requirements include an annual self-certification and clear documentation of the justification to support the increase in the threshold. Acceptable reasons for justification must meet one of the following criteria: • A qualification as a low-risk auditee, in accordance with the criteria in § 200.520 for the most recent audit, • An annual internal institutional risk assessment to identify, mitigate, and manage financial risks, or, • A higher threshold consistent with state law. This flexibility would allow Minnesota local governments to increase and align their federal procurement procedures, specifically the micro-purchase threshold, with state law, which allows for procurements below $25,000 to be made without competitive price or rate quotations. We recommend that the City review its current federal procurement policy. If the micro-purchase threshold in your currently adopted policy is below the allowable FAR limit of $10,000, you would need to make a one-time amendment to the policy to adopt the $10,000 FAR limit before using it. If you prefer to increase your federal micro-purchase threshold to $25,000 to align it with state law, in addition to amending your federal procurement policy, you would need to annually certify the higher threshold and the justification for using the higher threshold. SIGNIFICANT ACCOUNTING POLICIES Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note 1 of the notes to basic financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year ended December 31, 2020. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them m ay differ significantly from those expected. The most sensitive estimate affecting the financial statements was: • The depreciation of capital assets involves estimates pertaining to useful lives. -4- We evaluated the key factors and assumptions used by management to develop these accounting estimates in determining that they are reasonable in relation to the basic financial statements taken as a whole. The financial statement disclosures are neutral, consistent, and clear. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. There were no misstatements detected as a result of audit procedures that were material, either individually or in the aggregate, to each opinion unit’s financial statements taken as a whole. DISAGREEMENTS WITH MANAGEMENT For purposes of this report, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. MANAGEMENT REPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated June 22, 2021. MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulti ng accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. OTHER AUDIT FINDINGS OR ISSUES We generally discuss a variety of matters, including the application of accounting principles and auditing standards with management each year prior to retention as the City’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. OTHER MATTERS We were not engaged to report on the introductory section, which accompanies the financial statements, but is not required supplementary information. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. -5- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City’s governmental funds, which includes the General, special revenue, debt service, and capital project funds . These funds are used to account for the basic services the City provides to all of its citizens , which are financed primarily with property taxes. The governmental fund information in the City’s financial statements focuses on budgetary compliance and the sufficiency of each governmental fund’s current assets to finance its current liabilities. PROPERTY TAXES Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. For the 2019 fiscal year, local ad valorem property tax levies provided 40.8 percent of the total governmental fund revenues for cities over 2,500 in population, and 37.6 percent for cities under 2,500 in population. Total property taxes levied by all Minnesota cities for taxes payable in 2020 increased 6.1 percent from the prior year. The total tax capacity value of property in Minnesota cities increased about 6.5 percent for the 2020 levy year. The tax capacity values used for levying property taxes are based on the assessed market values for the previous fiscal year (e.g., tax capacity values for taxes levied in 2020 were based on assessed market values as of January 1, 2019), so the trend of change in these tax capacity values lags somewhat behind the housing market and economy in general. The City’s taxable market value increased 2.7 percent for taxes payable in 2019 and 8.7 percent for taxes payable in 2020. The following graph shows the City’s changes in taxable market value over the past five years: $– $20,000,000 $40,000,000 $60,000,000 $80,000,000 $100,000,000 $120,000,000 $140,000,000 2016 2017 2018 2019 2020 Total Market Value -6- Tax capacity is considered the actual base available for taxation. It is calculated by applying the state’s property classification system to each property’s market value . Each property classification, such as commercial or residential, has a different calculation and uses different rates . Consequently, a city’s total tax capacity will change at a different rate than its total market value, as tax capacity is affected by the proportion of its tax base that is in each property classification from year-to-year, as well as legislative changes to tax rates. The City’s tax capacity increased 1.5 percent and 9.8 percent for taxes payable in 2019 and 2020, respectively. The following graph shows the City’s change in tax capacities over the past five years: $– $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 2016 2017 2018 2019 2020 Local Tax Capacity The following table presents the average tax rates applied to city residents for each of the last two levy years: 2019 2020 Average tax rate City 40.4 41.3 County 52.9 52.3 School 26.1 36.8 Special taxing entities 6.6 6.6 Total 126.0 137.0 Rates Expressed as a Percentage of Net Tax Capacity City of Gem Lake The City’s average tax rate was consistent with the prior year, except for the school taxing authority, which increased as presented in the table above. -7- GOVERNMENTAL FUND BALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2020, presented both by fund balance classification and by major fund: 2020 2019 Change Fund balances of governmental funds Total by classification Nonspendable 1,137$ 1,050$ 87$ Restricted 256,476 229,444 27,032 Assigned 452,003 242,288 209,715 Unassigned 262,050 259,989 2,061 Total governmental funds 971,666$ 732,771$ 238,895$ Total by fund General 263,187$ 495,267$ (232,080)$ G.O. Capital Improvement Plan Bonds Series 2007A 129,143 124,902 4,241 G.O. Capital Improvement Plan Bonds Series 2018A 82,639 59,225 23,414 Hoffman Road – (232,018) 232,018 Schueneman Road – (2,210) 2,210 Street Improvements 452,003 242,288 209,715 Parks and Playground 44,694 45,317 (623) Total governmental funds 971,666$ 732,771$ 238,895$ as of December 31, Governmental Funds Change in Fund Balance Fund Balance In total, the fund balances of the City’s governmental funds increased by $238,895 during the year ended December 31, 2020. Assigned fund balance increased $209,715, primarily in street improvements. The decline in the General Fund balance is mostly due to fund balance transfer s to finance the activity in the Hoffman Road Fund and future street improvements. -8- GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as a city’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year-to-year, due to the effect of inflation and changes in its operation. Also, certain data in these tables may be classified differently than how they appear in the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of the City. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. State-Wide Year December 31, 2019 2018 2019 2020 Population 2,500–10,000 454 467 467 Property taxes 514$ 1,026$ 952$ 1,193$ Tax increments 30 – – – Franchise and other taxes 45 – – – Special assessments 54 206 264 251 Licenses and permits 40 111 207 67 Intergovernmental revenues 342 33 36 21 Charges for services 135 107 47 4 Other 89 54 57 41 Total revenue 1,249$ 1,537$ 1,563$ 1,577$ City of Gem Lake Governmental Funds Revenue per Capita With State-Wide Averages by Population Class The City’s governmental fund revenues for 2020 were $736,376, an increase of $6,664 (0.9 percent), or $14 per capita, from the prior year. The largest change in the table above occurred in property tax revenues and license and permits revenues. Property taxes increased $241 per capita from the prior year, with an increase in the certified levy. Licenses and permits revenue decreased $140 per capita from the prior year, due to less new home permits. Charges for services declined as a result of less development activity in 2020. -9- The expenditures of governmental funds will also vary from state-wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: • Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. • Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. • Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor . Some debt may be repaid through specific sources, such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with comparative state-wide averages, are presented in the following table: State-Wide Year December 31, 2019 2018 2019 2020 Population 2,500–10,000 454 467 467 Current General government 152$ 328$ 323$ 303$ Public safety 300 176 184 228 Streets and highways 146 158 117 104 Culture and recreation 103 – – – All other 74 307 207 125 Total current 775 969 831 760 Capital outlay and construction 438 1,193 138 19 Debt service Principal 168 132 139 193 Interest and fiscal charges 43 159 90 93 Total debt service 211 291 229 286 Total expenditures 1,424$ 2,453$ 1,198$ 1,065$ Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class City of Gem Lake Total expenditures in the City’s governmental funds for 2020 were $497,481, a decrease of $61,995 (11.1 percent), or $133 per capita, from the prior year. Capital outlay and construction expenditures decreased $119 per capita, due to less road projects in the current year. Total current expenditures decreased $71 per capita, due to less development activity in the current year. Total debt service increased $57 per capita, with the recent issuance of new debt. -10- GENERAL FUND The City’s General Fund accounts for the financial activity of the basic services provided to the community. The primary services included within this fund are the administration of the municipal operation, police and fire protection, building inspection, streets and highway maintenance, and parks and recreation. The graph below illustrates the change in the General Fund financial position over the last five years. We have also included a line representing annual expenditures to reflect the change in the size of the General Fund operation over the same period. 2016 2017 2018 2019 2020 Fund Balance $213,585 $329,141 $394,915 $495,267 $263,187 Cash (Net)$222,820 $358,163 $424,252 $514,910 $294,991 Expenditures $342,460 $360,300 $431,839 $376,034 $353,621 $– $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 General Fund Financial Position Year Ended December 31, The total fund balance of the City’s General Fund decreased $232,080 in 2020, as compared to a balanced budget projected in the final budget. The City approved transfers to finance fund balance deficits in other funds and future street improvements, contributing to the variance in the final budget. As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels. This is an important factor because a government, like any organization, requires a certain amount of equity to operate. A healthy financial position allows the City to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the adequate and consistent funding of services, repairs, and unexpected costs; and is a factor in determining the City’s bond rating and resulting interest costs. Maintaining an adequate fund balance has become increasingly important gi ven the fluctuations in state funding for cities in recent years. A trend that is typical to Minnesota local governments, especially the General Fund of cities, is the unusual cash flow experienced throughout the year. The City’s General Fund cash disbursements are made fairly evenly during the year, other than the impact of seasonal services, such as snowplowing, street maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Taxes comprise about 88.8 percent of the fund’s total annual revenue. Approximately half of these revenues are received by the City in July and the rest in December. Consequently, the City needs to have adequate cash reserves to finance its everyday operations between these payments. The City’s unassigned General Fund balance at the end of the 2020 fiscal year, represents approximately 74.1 percent of annual expenditures, based on 2020 levels. -11- The following graph reflects the City’s General Fund revenue sources for 2020 compared to budget: All Other Licenses and Permits Charges for Services Fines and Forfeits Intergovernmental Taxes General Fund Revenue Budget and Actual Budget Actual General Fund revenue for 2020 was $531,541, which was $12,403 (2.4 percent) more than budget. Taxes were over budget, due to better than projected tax collections. All other was over budget, due to conservative budgeting and investment earnings performing better than expected. The following graph presents the City’s General Fund revenues by source for the last five years. The graph reflects the City’s reliance on property tax sources of revenue. Taxes Intergovernmental Fines and Forfeits Charges for Services Licenses and Permits All Other 2016 $223,118 $9,796 $3,210 $5,705 $34,108 $19,584 2017 $359,657 $16,619 $1,072 $36,949 $45,772 $15,787 2018 $379,124 $15,817 $1,145 $48,650 $50,362 $22,515 2019 $370,729 $16,759 $1,769 $21,817 $96,742 $18,820 2020 $472,092 $9,885 $620 $1,662 $31,439 $15,843 $– $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 General Fund Revenue by Source Year Ended December 31, Total General Fund revenue for 2020 was $4,905 (0.9 percent) higher than last year. Taxes increased by $101,363, due to an increase in the approved tax levy. Charges for services and licenses and permits were less than the prior year, due to less development in the City in the current year. -12- The following graph illustrates the components of General Fund spending for 2020 compared to budget: All Other Public Works Public Safety General Government General Fund Expenditures Budget and Actual Budget Actual General Fund expenditures for 2020 were $353,621, which was $110,517 (23.8 percent) under budget. General government expenditures were $39,984 under budget, due to the City not spending the City Council-approved contingency funds and lower than projected legal expenditures. Public works expenditures were $59,259 under budget, due to lower than expected costs for tree trimming and snow removal. The City also transferred out $410,000 to other funds for capital projects and road improvement purposes. The following graph presents the City’s General Fund expenditures by function for the last five years: General Government Public Safety Public Works All Other 2016 $134,037 $119,793 $37,508 $51,122 2017 $129,980 $121,247 $30,952 $78,121 2018 $148,709 $80,122 $71,983 $131,025 2019 $151,038 $85,725 $54,687 $84,584 2020 $141,395 $106,319 $48,720 $57,187 $– $25,000 $50,000 $75,000 $100,000 $125,000 $150,000 $175,000 General Fund Expenditures by Function Year Ended December 31, Total General Fund expenditures for 2020 were $22,413 (6.0 percent) lower than the previous year. All other expenditures decreased $27,397, due to less development activity in the current year. -13- ENTERPRISE FUNDS OVERVIEW The City maintains two enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which include the Water Fund and Sewer Fund. ENTERPRISE FUNDS FINANCIAL POSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2020, presented both by classification and by fund: 2020 2019 Change Net position of enterprise funds Total by classification Net investment in capital assets 1,291,806$ 1,311,032$ (19,226)$ Unrestricted 422,201 454,037 (31,836) Total enterprise funds 1,714,007$ 1,765,069$ (51,062)$ Total by fund Water 607,882$ 666,278$ (58,396)$ Sewer 1,106,125 1,098,791 7,334 Total enterprise funds 1,714,007$ 1,765,069$ (51,062)$ Enterprise Funds Change in Financial Position Net Position as of December 31, In total, the net position of the City’s enterprise funds decreased by $51,062 during the year ended December 31, 2020. The decrease in unrestricted net position is primarily related to negative operating results in the Water Fund in the current year. -14- WATER FUND The following graph presents three years of comparative operating results for the City’s Water Fund: 2018 2019 2020 Oper Rev $10,040 $37,538 $16,042 Oper Exp $21,173 $55,212 $73,975 Oper Inc (Loss)$(11,133)$(17,674)$(57,933) Inc (Loss) Before Dep $(1,306)$(5,150)$(44,464) $(60,000) $(40,000) $(20,000) $– $20,000 $40,000 $60,000 $80,000 Water Fund Year Ended December 31, The Water Fund ended 2020 with a total net position of $607,882, a decrease of $58,396 from the prior year. Of this, $685,891 represents the investment in capital assets, leaving unrestricted net position of negative $78,009. Operating revenue in the Water Fund decreased $21,496 from the prior year. The decrease is due to less home construction, resulting in less collected for water access charges. Water Fund operating expenses for 2020 increased $18,763 from the previous year. The increase is due to more costs for water usage from the City of Vadnais Heights. -15- SEWER FUND The following graph presents five years of comparative operating results for the City’s Sewer Fund: 2016 2017 2018 2019 2020 Oper Rev $45,117 $56,140 $58,137 $65,428 $61,943 Oper Exp $42,720 $54,927 $92,067 $56,516 $60,903 Inc Before Dep $14,854 $13,670 $(20,013)$24,977 $17,107 Oper Inc (Loss)$2,397 $1,213 $(33,930)$8,912 $1,040 $(75,000) $(50,000) $(25,000) $– $25,000 $50,000 $75,000 $100,000 Sewer Fund Year Ended December 31, The Sewer Fund ended 2020 with a total net position of $1,106,125, an increase of $7,334 from the prior year. Of this, $605,915 represents the investment in capital assets, leaving unrestricted net position of $500,210. Operating revenue in the Sewer Fund decreased $3,485 from the prior year. The decrease is due to less home construction, resulting in less collected for sewer access charges. Sewer Fund operating expenses for 2020 increased $4,387 from the previous year. The increase is due to more costs for Metropolitan Council Environmental Services charges. THIS PAGE INTENTIONALLY LEFT BLANK -16- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. STATEMENT OF NET POSITION The Statement of Net Position essentially tells you what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, net position is divided into three components: net investment in capital assets, restricted, and unrestricted. The following table presents the components of the City’s net position as of December 31, 2020 and 2019, for governmental activities and business-type activities: 2020 2019 Change Net position Governmental activities Net investment in capital assets 344,931$ 335,719$ 9,212$ Restricted 765,096 794,416 (29,320) Unrestricted 1,019,820 856,234 163,586 Total governmental activities 2,129,847 1,986,369 143,478 Business-type activities Net investment in capital assets 1,291,806 1,311,032 (19,226) Unrestricted 422,201 454,037 (31,836) Total business-type activities 1,714,007 1,765,069 (51,062) Total net position 3,843,854$ 3,751,438$ 92,416$ As of December 31, The City’s total net position at December 31, 2020 was $92,416 higher than the previous year-end. Of the increase, $143,478 came from governmental activities and was offset by a $51,062 decrease from business-type activities. The governmental activities restricted net position decreased $29,320, mainly due to payments on long-term debt in the debt service funds. Unrestricted net position increased $163,586, mainly due to positive operating results. The decrease in business-type activities net position was explained in the preceding discussion of the activities of the enterprise funds. -17- STATEMENT OF ACTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in the net position of the City for the years ended December 31, 2020 and 2019: 2019 Program Expenses Revenues Net Change Net Change Net (expense) revenue Governmental activities General government 164,991$ 30,812$ (134,179)$ (107,741)$ Public safety 106,319 – (106,319) (85,725) Public works 115,405 43,058 (72,347) 29,503 Conservation and development 59,270 1,095 (58,175) (97,789) Interest on long-term debt 40,984 – (40,984) (38,960) Business-type activities Water 73,975 16,042 (57,933) (17,674) Sewer 60,903 61,943 1,040 8,912 621,847$ 152,950$ (468,897) (309,474) General revenues Property taxes 543,590 453,094 Investment earnings 17,332 26,981 Other revenues 391 2,513 561,313 482,588 92,416$ 173,114$ Total net (expense) revenue Total general revenues Change in net position 2020 One of the goals of this statement is to provide a side-by-side comparison to illustrate the difference in the way the City’s governmental and business-type operations are financed. The table clearly illustrates the dependence of the City’s governmental operations on general revenues, such as property taxes. -18- LEGISLATIVE UPDATES The 2020 legislative session, coming in the second half of the state’s fiscal biennium, was expected to be a typical short session focused primarily on making relatively minor modifications to the biennial budget. Given a projected budget surplus of $1.5 billion going into the session, consideration of a substantial capital investment and bonding bill was also a potential focus. The start of the legislative session in February was followed by a series of significant events that changed the course of the session, including a world-wide health pandemic, the death of George Floyd while in police custody and the ensuing protests and unrest, and a hotly contested national election. On March 13, 2020, the Governor issued an executive order declaring a peacetime emergency, giving his administration the ability to quickly impose restrictions and measures aimed at mitigating the COVID-19 outbreak. By early May, the state’s budget outlook had changed from a robust surplus to a projected deficit of $2.4 billion. The legislative session ultimately encompassed an unprecedented seven special sessions, more than double the previous state record of three, with the final special session in mid-December. In the end, a $1.87 billion omnibus bonding bill was passed that included $1.36 billion in general obligation state bonding for capital improvements, $31.0 million in supplemental General Fund budget spending, and provisions for tax relief and economic assistance. The session also yielded a new Police Accountability Act, and a $217.0 million economic relief package to help businesses negatively impacted by the pandemic. The following is a brief summary of legislative changes from the 2020 session or previous legislative sessions potentially impacting Minnesota cities. Coronavirus Aid, Relief, and Economic Security (CARES) Act – The CARES Act provided federal economic relief to protect the American people from the public health and economic impacts of COVID-19. Minnesota received approximately $2.2 billion in funding under the CARES Act. When the first legislative special session ended without an agreement on the distribution of approximately $841.5 million of federal Coronavirus Relief Fund (CRF) funding earmarked for Minnesota local governments, the Governor distributed the funds by executive order based on the framework of the legislative agreement debated during the first special session. This resulted in $350.4 million being distributed directly to Minnesota cities with populations equal to or greater than 200. The funds were authorized for use for unbudgeted costs related to the COVID-19 pandemic, but not to replace lost revenues. In accordance with CARES Act provisions, the CRF funding was available to cover costs that; 1) were necessary expenditures incurred due to the public health emergency related to COVID-19; 2) were not accounted for in the entity’s budget most recently approved as of March 27, 2020; and 3) were incurred during the period from March 1, 2020 through December 31, 2020 (the availability period end date was revised by the state to November 15, 2020 for Minnesota cities). Emergency Small Business Assistance Program – The Legislature created a program to appropriate $60.0 million of federal CRF funding to make grants available through the Minnesota Department of Employment and Economic Development for eligible small businesses impacted by COVID-19. Small businesses employing up to 50 full-time employees are eligible to receive grants of up to $10,000. The allocation is split between the metro area and greater Minnes ota, with specific allocations for businesses owned by minorities, veterans, and women. $18.0 million of the allocation is earmarked for businesses with 6 or less employees. Workers’ Compensation Claims – COVID-19 Presumption – The Legislature adopted several new provisions to state unemployment statutes related to COVID-19, including a presumption that an employee who contracts COVID-19 has an “occupational disease” arising out of, and in the course of, employment if the employee works in one of the specified occupations and has a confirmed case of COVID-19. Covered occupations include nurses, healthcare workers, and workers required to provide childcare for first responders and healthcare workers under Executive Orders 20-02 and 20-19. The COVID-19 presumption provision sunsets on May 1, 2021. -19- Bonding Bill – The 2020 bonding bill provided financing for approximately $1.36 billion of projects. Some of the more significant appropriations for local infrastructure included: $105 million in undesignated grants for local road improvement and bridge replacement; $100 million for water infrastructure and point source implementation grants; $25 million for state match of federal grants for public facilities improvements, $20 million for natural resource asset preservation, $17 million for flood control mitigation, $15 million for the Local Government Roads Wetlands Replacement Program; $5 million for Metropolitan Council inflow and infiltration grants; and $5 million for metropolitan regional parks and trails. The bill also included funding for a number of state initiatives, including: $300 million in trunk highway bonds for the improvement of the state trunk highway system; $145 million in appropriation bonds to fund the infrastructure and capital needs of the Minnesota Housing Finance Agency, Minnesota Pollution Control Agency, and Minnesota Public Television; $30 million for state agency projects aimed at promoting racial equity, $29.5 million for the state Emergency Operations Center; and $16 milli on for the Minnesota Housing Finance Agency. The bill provides authority for eligible local governments to own and operate childcare facilities, and permits local governments to enter into management agreements with licensed childcare providers to operate in publicly-owned facilities. It also makes cities, counties, school districts, and joint powers boards located outside of the seven-county metro area eligible to apply for grants through the Greater Minnesota Childcare Facility Capital Grant Program. The bill also included a provision extending the equal pay certificate of compliance requirement to contracts by any public entity, including political subdivisions, using state general obligation bond proceeds for all or part of a capital project. Local governments will be responsible for requiring that bids include proper certification on applicable projects, which applies to projects for goods or services valued at more than $1 million utilizing appropriated bond proceeds on or after January 1, 2022. Elections – A number of measures were passed to help ensure the safe and secure conduct of the 2020 state primary and general elections, including; allowing for the processing of absentee ballots to begin 14 days prior to the date of the election, extending the period during which absentee ballots could be processed for 2 days following the election, accepting electronic filings for affidavits of candidacy or nominating petitions, and specifying that municipalities were to use schools as polling places only when no other public or private location was reasonably available. Funds from the federal Help America Vote Act were made available for modernizing, securing, and improving election facilities, a portion of which was made available for grants to local governments to fund activities prescribed by this program. Minors Operating Lawn Care Equipment – Effective May 28, 2020, Minnesota Statutes lowered the employment age for operating lawn care equipment to age 16. Minors aged 16 and 17 must be trained in the safe operation of the equipment and wear appropriate personal protective equipment when operating the lawn care equipment. The exception under this statute applies only to minors directly employed by golf courses, resorts, rental property owners, or municipalities to perform lawn care on golf courses, resort grounds, rental property, or municipal grounds. Open Meeting Law Exception – The interactive television provision of the Minnesota Open Meeting Law was amended to allow for participation in meetings by interactive electronic means, such as Skype or Zoom, without requiring that an elected official be advised to do so by a healthcare professional for personal or family medical reasons. This allowance is available only when a national security or peacetime emergency has been declared and may be used up to 60 days after the emergency declaration has been lifted. Whenever public meetings are held via interactive electronic means of this type, votes must be conducted by roll call and be recorded in the minutes. Expanded Authority for Electronic Signatures During COVID-19 – Effective May 17, 2020, cities are allowed to accept certain documents, signatures, or filings electronically, by mail, or facsimile during the COVID-19 pandemic, including; planning and zoning applications and permits; land use documents; documents requiring the signature of licensed architects, engineers, land surveyors, geoscientists, or interior designers; applications for birth or death certificates; or recording notary commis sions. This accommodation expires January 16, 2021, or 60 days following the termination of the peacetime public health emergency. -20- Solid Waste Recycling Exemption – The requirement that not more than 15 percent of mixed municipal solid waste received by recycling or composting facilities be disposed of, rather than recycled or composted, is suspended as long as the need for the exception is triggered by operational changes implemented to address the COVID-19 pandemic. Pension Changes – Effective January 1, 2021, the maximum lump-sum pension amount for volunteer firefighters is increased from $10,000 to $15,000 per year of service. Municipalities are permitted to split state fire aid received between its career firefighters and its affiliated volunteer firefighters, but only if the amount allocated to the career firefighters is approved by the membership of the volunteer firefighter relief association. Any aid allocated to career firefighters must be used to pay the Public Employees Retirement Association (PERA) employer contributions on their behalf within 18 months of the transfer or be returned to the relief association. Police Accountability Act – The Legislature passed the Police Accountability Act, which enacted a number of changes to laws governing police conduct, training, and oversight. Among the more significant changes adopted were: • Defined and authorized “public safety peer counseling” and “critical incident stress management,” and classifies information shared in these settings as private data. • Established an Independent Use of Force Investigations Unit within the Bureau of Criminal Apprehension to investigate all officer-involved deaths in the state, as well as criminal sexual assault allegations against peace officers, effective August 1, 2020. • Authorized statutory or home rule charter cities to offer incentives to encourage a person hired as a peace officer to be a resident of the city. • Limited the use of certain restraint methods by peace officer unless the use of deadly force is authorized in a given situation. • Established and modified provisions related to law enforcement use of deadly force. • Defined and prohibited “warrior-style” training for peace officers. • Established a 15-member “Ensuring Police Excellence and Improving Community Relations Advisory Council” under the Police Officer Standards and Training (POST) Board, to assist the POST Board in maintaining policies and regulating peace officers in a manner that ensures the protection of civil and human rights. • Established a duty for peace officers to intercede when another officer is using excessive force and report incidents of excessive force to supervisors. THIS PAGE INTENTIONALLY LEFT BLANK -21- ACCOUNTING AND AUDITING UPDATES The following is a summary of Governmental Accounting Standards Board (GASB) standards expected to be implemented in the next few years. Due to the COVID-19 pandemic, the GASB has delayed the original implementation dates of these and other standards as described below. GASB Statement No. 87, Leases A lease is a contract that transfers control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this statement. Governments enter into leases for many types of assets. Under the previous guidance, leases were classified as either capital or operating depending on whether the lease met any of the four tests. In many cases, the previous guidance resulted in reporting lease transactions differently than similar nonlease financing transactions. The goal of this statement is to better meet the information needs of users by improving accounting and financial reporting for leases by governments. It establishes a single model for lease a ccounting based on the principle that leases are financings of the right to use an underlying asset. This statement increases the usefulness of financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. Under this statement, a lessee is required to recognize a lease liability and an intangible right to use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. To reduce the cost of implementation, this statement includes an exception for short -term leases, defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract. The requirements of this statement are effective for reporting periods beginning after June 15, 2021. -22- GASB Statement No. 91, Conduit Debt Obligations The primary objectives of this statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures. A conduit debt obligation is defined as a debt instrument having all of the following characteristics: • There are at least three parties involved: (1) an issuer, (2) a third party obligor, and (3) a debt holder or a debt trustee. • The issuer and the third party obligor are not within the same financial reporting entity. • The debt obligation is not a parity bond of the issuer, nor is it cross -collateralized with other debt of the issuer. • The third party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance. • The third party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments). This statement also addresses arrangements, often characterized as leases, that are associated with conduit debt obligations. In those arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by third party obligors in the course of their activities. This statement requires issuers to disclose general information about their conduit debt obligations, organized by type of commitment, including the aggregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each type of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period. The requirements of this statement are effective for reporting periods beginning after December 15, 2021. Earlier application is encouraged. -23- GASB Statement No. 92, Omnibus 2020 The objectives of this statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing practice issues that have been identified during implementation and application of certain GASB Statements. This statement addresses a variety of topics and includes specific provisions about the following: • The effective date of Statement No. 87, Leases, and Implementation Guide No. 2019-3, Leases, for interim financial reports • Reporting of intra-entity transfers of assets between a primary government employer and a component unit defined benefit pension plan or defined benefit other post-employment benefit (OPEB) plan • The applicability of Statements No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, as amended, and No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, to reporting assets accumulated for post-employment benefits • The applicability of certain requirements of Statement No. 84, Fiduciary Activities, to post-employment benefit arrangements • Measurement of liabilities (and assets, if any) related to asset retirement obligations in a government acquisition • Reporting by public entity risk pools for amounts that are recoverable from reinsurers or excess insurers • Reference to nonrecurring fair value measurements of assets or liabilities in authoritative literature • Terminology used to refer to derivative instruments The requirements of this statement are effective for fiscal years beginning after June 15, 2021. Earlier application is encouraged. GASB Statement No. 96, Subscription-Based Information Technology Arrangements This statement provides guidance on the accounting and financial reporting for subscription -based information technology arrangements (SBITAs) for government end users (governments). This statement (1) defines a SBITA; (2) establishes that a SBITA results in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended. An SBITA is defined as a contract that conveys control of the right to use another party’s (an SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction. Under this statement, a government generally should recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability. This statement provides an exception for short-term SBITAs with a maximum possible term under the SBITA contract of 12 months, including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources. This statement requires a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the subscription asset, accumulated amortization, other payments not included in the measurement of a subscription liability, principal and interest requirements for the subscription liability, and other essential information. The requirements of this statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. -24- GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans—an Amendment of GASB Statement No. 14 and No. 84, and a Supersession of GASB Statement No. 32 The primary objectives of this statement are to (1) increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which a potential component unit does not have a governing board and the primary government performs the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain defined contribution pension plans, defined contribution OPEB plans, and employee benefit plans other than pension plans or OPEB plans (other employee benefit plans) as fiduciary component units in fiduciary fund financial statements; and (3) enhance the relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code Section 457 deferred compensation plans (Section 457 plans) that meet the definition of a pension plan and for benefits provided through those plans. The requirements of this statement that (1) exempt primary governments that perform the duties that a government board typically performs from treating the absence of a governing board the same as the appointment of a voting majority of a governing board in determining whether they are financially accountable for defined contribution pension plans, defined contribution OPEB plans, or other employee benefit plans, and (2) limit the applicability of the financial burden criterion in paragraph 7 of Statement 84 to defined benefit pension plans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement 74, respectively, are effective immediately. The requirements of this statement that are related to the accounting and financial reporting for Section 457 plans are effective for fiscal years beginning after June 15, 2021. For purposes of determining whether a primary government is financially accountable for a potential component unit, the requirements of this statement that provide that for all other arrangements, the absence of a governing board be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically would perform, are effective for reporting periods beginning after June 15, 2021. Earlier application of those requirements is encouraged and permitted by requirement as specified within this statement.