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III.5. 2014 Comprehensive Financial Report; HarkessCITY OF HOPKINS FINANCE DEPARTMENT MEMORANDUM Date: July 7, 2015 To: Mayor & City Council From: Christine Harkess, Finance Director Subject: 2014 Comprehensive Annual Financial Report (CAFR) Staff has prepared a presentation of a consolidated version of the 2014 Comprehensive Annual Financial Report (CAFR). Dennis Hoogeveen, Principal of the audit firm CliftonLarsonAllen, LLC will be present to review the results of the 2014 audit to the City Council and public. Supporting Information Power Point Presentation 2014 Executive Audit Summary 2014 Comprehensive Annual Financial Report (separate attachment due to size) 6/30/2015 City Presentation The City of Hopkins presents Economic Conditions its Comprehensive Annual Financial Report Major Initiatives Revenue by fund type This presentation provides a broad overview of our Expenditures by fund type financial performance and position. Statement of Net Assets Statement of Activities All information is public. 1 6/30/2015 City Presentation Economic Condition •Valuation of new non-residential construction was $9.067 million in 2014. •The economic development and redevelopment market within the City of Hopkins is very active. •An additional $149 million of construction is projected over the next several years. City Presentation Significant Projects in 2014 •Super ValuTest Kitchens$ 1.3 million •Hopkins Honda Addition$ 1.4 million •Walser Jeep Addition$1.6 million •Marketplace & Main Townhomes$ 2.4 million •Gallery Flats Apartments$25.0 million 2 6/30/2015 City Presentation Future Projects •Hopkins Cold Storage site redevelopment$62 million •Fifth Avenue Flats$40 million •Johnson Building redevelopment$30 million •EBCO site redevelopment$10 million •Oxford Green Apartments$ 7 million City Presentation Major Municipal Initiatives •Street repair and improvements$2,872,000 •Utility improvement projects$ 910,056 •City park improvements$ 133,775 •Cottageville Park improvements$ 351,966 •Building controls upgrade$ 38,387 3 6/30/2015 City Presentation Financial Highlights •Assets exceeded liabilities by approximately $69.0 million –About 69% is capital assets ($48.2 million) –$3.86 million can be used for ongoing obligations •Governmental Funds fund balances totaled $25.1 million an increase of $8.6 million from 2013. –Primarily due to sale on refunded bonds •Unreserved fund balance of the General Fund totaled $5.2 million or 47% of expenditures. •Debt increased by $5.7 million –Refunded debt was issued to call debt in Feb 2015 City Presentation Financial Highlights –cont. •Governmental Activities –Revenues increased by $96,000 over 2013 •Similar activity level as in 2013 –Expenditures increased by $469,889 over 2013 •Street projects •Economic Development activities –Overall Governmental Net Position increased by $1.8 million •Business Type Activities –Revenues were tracking similar to 2013, however expenses were higher in the water & sewer funds. –Overall Business Type Net Position decreased by $163,604 4 6/30/2015 City Presentation Revenues and Other Financing Sources by Fund Type Internal Service, 434,539 Enterprise, 6,341,247 General, 11,354,442 Capital Project, 2,657,583 Debt Service, 2,630,904 Special Revenue, 4,700,762 City Presentation Expenditures and Other Financing Uses by Fund Type Internal Service, 809,034 Enterprise, 6,011,758 General, 11,089,324 Capital Project, 4,225,839 Debt Service, Special Revenue, 2,825,940 3,566,116 5 6/30/2015 (in thousands) 20142013 Statement of Net Assets Assets Cash and investments31,517$ 21,560$ Taxes & special assessments receivable 5,0254,561 Other receivables1,102 2,264 Other assets73,017 74,241 Deferred outflows313 350 $ 103,440110,510$ Total Assets Liabilities Accounts payable2,082$ 1,005$ Accrued compensation134 413 Other liabilities3,032 2,337 Long term liabilities36,227 30,339 Total Liabilities$ 34,09441,475$ $ 69,34669,035$ Total Net Position Governmental Fund Types, (in thousands) 20142013 Statement of Activities Revenues Property taxes and assessments13,908$ 12,568$ Charges for service1,069 1,146 Operating grants & contributions2,944 5,273 Capital grants & contributions2,728 1,776 Grants & contributions not restricted21 21 Other revenues714 155 $ 20,93921,384$ Total Revenues Expenditures General government2,276$ 2,108$ Public safety6,526 6,358 Health & welfare171 166 Highways & streets5,709 5,845 Urban redevelopment & housing2,248 2,001 Culture & recreation1,942 1,858 Interest on long-term debt712 778 $ 19,11419,584$ Total Expenditures Change in Net Position$ 1,8251,800$ 6 6/30/2015 Proprietary Fund Types , (in thousands)20142013 Statement of Activities Revenues Charges for service5,521$ 5,521$ Operating grants & contributions795 561 Capital grants & contributions- 144 Other revenues25 18 Total Revenues$ 6,2446,341$ Expenses Water1,541$ 1,384$ Sewer2,042 1,991 Storm Sewer509 440 Refuse834 820 Pavilion/Ice Arena460 426 Housing & Redevelopment Authority626 615 Transfers493 145 Total Expenses$ 5,8216,505$ $ 423(164)$ Change in Net Position Fund Equity Fund Balance/ Fund TypeEquityIncr/(Decr) General Fund5,736,635$ 255,118$ Special Revenue Funds4,954,396$ 815,992$ Debt Service Funds10,427,856$ 6,957,109$ Capital Project Funds4,008,604$ 555,952$ Enterprise Funds18,892,140$ (163,604)$ Internal Service Funds3,814,702$ (374,495)$ 7 6/30/2015 CAFR Changes in Reporting •2014 –Change in accounting principle •Changed capital asset threshold from $1,000 to $5,000 •2015 –Implementation of GASB 68 “Accounting & Financial Reporting for Pensions –Employers participating in cost-sharing multiple-employer plan must recognize their proportionate share of the net pension liability as a whole. –Net liability = total pension liability less the fiduciary net position (assets) 8 CITY OF HOPKINS EXECUTIVE AUDIT SUMMARY (EAS) DECEMBER 31, 2014 CITY OF HOPKINS TABLE OF CONTENTS DECEMBER 31, 2014 AUDIT REPORT SUMMARY FINANCIAL RESULTS GOVERNMENT-WIDE FINANCIAL STATEMENTS 2 GENERAL FUND 4 ENTERPRISE FUNDS 5 APPENDIX A FORMAL REQUIRED COMMUNICATIONS 6 APPENDIX B INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 10 APPENDIX C INDEPENDENT AUDITORS’ REPORT ON LEGAL COMPLIANCE 12 AUDIT REPORT SUMMARY We prepared this Executive Audit Summary and Management Report in conjunction with our audit of the City’s financial records for the year ended December 31, 2014. The following is a summary of reports we have issued: Audit Opinion The financial statements are fairly stated in accordance with generally accepted accounting principles. We issued an “unmodified” audit opinion. Yellow Book Opinion Our report on internal control over financial reporting noted no material weaknesses. Minnesota Legal Compliance One compliance issue was reported with respect to Minnesota Statutes. An independent member of Nexia International (1) FINANCIAL RESULTS GOVERNMENT-WIDE FINANCIAL STATEMENTS Statement of Net Position The Statement of Net Position reflects 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 left over to use for providing services after its debts are settled. However, those resources are not always in expendable form, or there may be restrictions on how some of those resources can be used. For instance, net investment in capital assets is the largest classification and reflects the balance of infrastructure (streets, storm water, sidewalks, etc.) and other assets net of the debt incurred to finance them and therefore, not cash available for use. In order to address this, the statement divides the net position into three components: net investment in capital assets, restricted net position, and unrestricted net position. The following is a condensed version of the Statement of Net Position at December 31, 2014: Governmental Business-Type ActivitiesActivitiesTotal Assets: Current Assets35,773,666$ 2,682,760$ 38,456,426$ Capital Assets49,314,501 22,425,930 71,740,431 Total Assets85,088,167 25,108,690 110,196,857 Deferred Outflows of Resources: Deferred Charge on Refunding312,743 - 312,743 Liabilities: Current Liabilities4,731,255 517,572 5,248,827 Long-Term Liabilities30,527,243 5,698,978 36,226,221 Total Liabilities35,258,498 6,216,550 41,475,048 Net Position: Net Investment in Capital Assets31,272,253 16,937,928 48,210,181 Restricted 16,967,889 - 16,967,889 Unrestricted1,902,270 1,954,212 3,856,482 Total Net Position50,142,412$ 18,892,140$ 69,034,552$ A significant portion of the City’s net position translate into restricted net position by virtue of external restrictions (statutory reserves) or by the nature of the fund they are in (e.g. equity in a debt service fund typically can only be spent on future repayment of debt). (2) 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. This statement 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 is a condensed version of the Statement of Activities for the year ended December 31, 2014: Functions/ProgramsExpensesProgram RevenueDifference Governmental Activities: General Government2,276,155$ 1,544,066$ (732,089)$ Public Safety6,526,230 1,244,625 (5,281,605) Health and Welfare171,187 169,987 (1,200) Highways and Streets5,709,009 2,718,251 (2,990,758) Urban Redevelopment and Housing2,247,553 65,684 (2,181,869) Culture and Recreation1,941,912 998,772 (943,140) Interest on Long-Term Debt711,697 - (711,697) Total Governmental Activities19,583,743 6,741,385 (12,842,358) Business-Type Activities: Water1,540,940 1,507,429 (33,511) Sewer2,042,106 2,112,358 70,252 Storm Sewer508,686 802,898 294,212 Refuse834,113 946,289 112,176 Pavilion/Ice Arena460,246 384,026 (76,220) Housing and Redevelopment Authority625,667 563,744 (61,923) Total Business-Type Activities6,011,758 6,316,744 304,986 Total Governmental and Business-Type Activities25,595,501$ 13,058,129$ (12,537,372) General Revenues: Property Taxes11,207,914 Tax Increments2,700,110 Grants and Contributions, Not Restricted20,510 Unrestricted Investment Earnings218,049 Gain on Disposal of Capital Assets27,235 Total General Revenues, Special Items, and Transfers14,173,818 Change in Net Position1,636,446$ (3) GENERAL FUND The following table presents the City’s General Fund revenue sources for each of the past five years. The most significant component is property taxes which amounted to $8,953,480 for 2014. It is important that the City operate governmental and enterprise funds effectively so that there is not a need to be subsidized by the General Fund. General Fund Revenue by Source Years Ended December 31, $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 20102011201220132014 TaxesIntergovernmentalCharges for ServicesLicense and PermitsOther The following table presents the City’s General Fund expenditures for each of the past five years. The most significant component is public safety which amounted to $5,955,884 for 2014. General Fund Expenditures by Function Years Ended December 31, $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 20102011201220132014 General GovernmentalPublic SafetyHealth & Welfare Highways & StreetsCulture & RecreationCapital Outlay Urban redevelopment and housing (4) GENERAL FUND (CONTINUED) Fund Balance – Total fund balance of the City’s General Fund increased by $255,118 during fiscal 2014, from $5,481,517 to $5,736,635 at December 31, 2014. A City’s fund balance in the General Fund is an important aspect in considering the City’s financial well-being since a healthy fund balance represents things such as the availability of general cash flows, as a cushion against unanticipated expenditures, funding deficiencies and similar problems. At December 31, 2014, the unassigned fund balance as a percentage of annual expenditures is 48.1% or approximately 25 weeks of expenditures. This compares to 44.8% and approximately 23 weeks of expenditures as of December 31, 2013. In order to properly analyze fund balance levels you must review all categories of fund balance (nonspendable, restricted, committed, and assigned) as well as growth indicators of the City. The percentage above is average for established communities such as the City of Hopkins. Budget to Actual – Total revenues in the General Fund were $408,313 (approx. 4%) higher than the budgeted amount while total expenditures were $153,195 (approx. 1%) higher than had been budgeted. After considering operating transfers, the net effect was an increase to total fund balance that was $255,118 more than had been reflected in the City’s budget. As part of any budget update initiated for fiscal 2014, the Council will want to take this and other budget variances into consideration in order to limit future budget differences to every extent possible. ENTERPRISE FUNDS The enterprise funds (Water Utility, Sewer Utility, Storm Sewer Utility, Refuse Utility, Pavilion/Ice Arena and Housing Authority Funds) have a healthy combined net position balance in the amount of $18,892,140 as of December 31, 2014. The largest portion of this being an investment in infrastructure and other capital assets net of related debt in the amount of $16,937,928. (5) APPENDIXA FORMAL REQUIRED COMMUNICATIONS Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins (the City) for the year ended December 31, 2014, and have issued our report thereon dated June 24, 2015. We have previously communicated to you 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. Professional standards also require that we communicate to you the following information related to our audit. Significant audit findings Qualitative aspects of accounting practices 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 to the financial statements. As described in Note 16, the City changed accounting policies related to capital assets by increasing their capitalization threshold from $1,000 to $5,000. Accordingly, the cumulative effect of the accounting change as is shown as an adjustment to net position as of January 1, 2014. We noted no transactions entered into by the entity 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 Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Management’s estimate of the useful lives of capital assets is based on authoritative guidance and past experience. Management’s estimate of the investments at fair value is based on published market values at December 31, 2014. Management’s estimate of the amount of the year-end compensated absences payable balance to be taken by employees within one year of December 31, 2014 is based on historical trends and anticipated leave time activity. We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. An independent member of Nexia International (6) Honorable Mayor and Members of the City Council City of Hopkins, Minnesota Qualitative aspects of accounting practices (continued) Financial statement disclosures Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. There were no particularly sensitive financial statement disclosures. 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. Uncorrected misstatements Professional standards require us to accumulate all misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. Management has determined the effects of the following uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements taken as a whole: A 2013 water use fee was recognized as an expense in 2014, the year it was paid, rather than the year it related to. As a result, 2014 water fund and business-type activities expenses and beginning net position are overstated by $8,531. The City did not accrue an expense and liability at December 31, 2013 for look-back sewer charges they were notified of in 2013 but did not pay until 2014. As a result, 2014 sewer fund and business-type activities expenses and beginning net position are overstated by $35,484. Corrected misstatements Management did not identify and we did not notify them of any financial statement misstatements detected as a result of audit procedures. Disagreements with management For purposes of this letter, 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 auditors’ report. No such disagreements arose during our audit. Management representations We have requested certain representations from management that are included in the management representation letter dated June 24, 2015. Management consultations with other independent accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the City’s financial statements or a determination of the type of auditors’ opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. (7) Significant issues discussed with management prior to engagement We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to engagement 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 engagement. Other audit findings or issues We have provided a separate letter to you dated June 24, 2015 at Appendix B, communicating internal control related matters identified during the audit. Audits of group financial statements We noted no matters related to the group audit that we consider to be significant to the responsibilities of those charged with governance of the group. Other information in documents containing audited financial statements With respect to the required supplementary information (RSI) accompanying the financial statements, we made certain inquiries of management about the methods of preparing the RSI, including whether the RSI has been measured and presented in accordance with prescribed guidelines, whether the methods of measurement and preparation have been changed from the prior period and the reasons for any such changes, and whether there were any significant assumptions or interpretations underlying the measurement or presentation of the RSI. We compared the RSI for consistency with management’s responses to the foregoing inquiries, the basic financial statements, and other knowledge obtained during the audit of the basic financial statements. Because these limited procedures do not provide sufficient evidence, we did not express an opinion or provide any assurance on the RSI. With respect to the combining and individual nonmajor fund statements and schedules (collectively, the supplementary information) accompanying the financial statements, on which we were engaged to report in relation to the financial statements as a whole, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period or the reasons for such changes, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. We have issued our report thereon dated June 24, 2015. The introductory section and statistical section accompanying the financial statements, which is the responsibility of management, was prepared for purposes of additional analysis and is not a required part of the financial statements. Such information was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we did not express an opinion or provide any assurance on it. * * * * * * (8) This communication is intended solely for the information and use of the Members of the City Council and management of the City, and is not intended to be, and should not be, used by anyone other than these specified parties. CliftonLarsonAllen LLP Minneapolis, Minnesota June 24, 2015 (9) APPENDIXB INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statementsof the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins (the City), as of and for the year ended December 31, 2014, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 24, 2015. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. Adeficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. An independent member of Nexia International (10) Honorable Mayor and Members of the City Council City of Hopkins Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance withGovernment Auditing Standards in considering the City’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. CliftonLarsonAllen LLP Minneapolis, Minnesota June 24, 2015 (11) APPENDIXC INDEPENDENT AUDITORS’ REPORT ON LEGAL COMPLIANCE Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota (the City), as of and for the year ended December 31, 2014, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 24, 2015. TheMinnesota Legal Compliance Audit Guide for Political Subdivisions promulgated by the State Auditor pursuant to Minn. Stat. § 6.65, identifies seven categories of compliance to be tested in connection with the audit of a City’s financial statements: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. In connection with our audit, nothing came to our attention that caused us to believe that the City failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions, except as noted below. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City’s noncompliance with the above-referenced provisions. Minnesota Statutes section 270C.66 requires that before making settlement with a contractor, political subdivisions must obtain a contractor affidavit (or Form IC134) showing that said contractor and any subcontractors have fulfilled the requirements of Minnesota withholding tax laws. During 2014, the City made final payment to a contractor before obtaining a Form IC134. The purpose of this report is solely to describe the scope of our testing of compliance relating to the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions and the results of that testing, and not to provide an opinion on the effectiveness of the City’s compliance. Accordingly, this communication is not suitable for any other purpose. CliftonLarsonAllen LLP Minneapolis, Minnesota June 24, 2015 An independent member of Nexia International (12)