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2013 City of Hopkins, MN Annual Report City of Hopkins, Minnesota Comprehensive Annual Financial Report for year ended December 31, 2013 COMPREHENSIVE ANNUAL FINANCIAL REPORT of the CITY OF HOPKINS, MN For The Year Ended December 31, 2013 Prepared by the Department of Finance i ii iii CITY OF HOPKINS, MINNESOTA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2013 SECTION I INTRODUCTORY SECTION 1 2 June 13, 2014 To the Honorable Mayor, Members of the Hopkins City Council and the Citizens of the City of Hopkins, Minnesota: The Comprehensive Annual Financial Report (CAFR) of the City of Hopkins, Minnesota (the City) for the fiscal year ended December 31, 2013 is hereby submitted. This report was prepared in accordance with U.S. generally accepted accounting principles (GAAP) as established by the Governmental Accounting Standards Board (GASB) and meets the requirements of the Minnesota State Auditor’s Office. This report consists of management’s representations concerning the finances of the City of Hopkins. Consequently, management assumes full responsibility for both the completeness and reliability of all of the information presented in this report. To provide a reasonable basis for making these representations, management of the City of Hopkins has established a comprehensive internal control framework that is designed both to protect the government’s assets from loss, theft, or misuse and to compile sufficient reliable information for the preparation of the City of Hopkins financial statements in conformity with GAAP. Because the cost of internal controls should not outweigh their benefits, the City of Hopkins comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The City of Hopkins financial statements have been audited by CliftonLarsonAllen LLP, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City of Hopkins for the fiscal year ended December 31, 2013, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded based upon the audit, that there was a reasonable basis for rendering unmodified opinions that the City of Hopkins financial statements for the fiscal year ended December 31, 2013, are fairly presented in conformity with GAAP. The independent auditors’ report is presented as the first component of the financial section of this report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management’s Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The City’s MD&A can be found in the financial section of this report immediately following the report of the independent auditors. 3 Profile of the Government Hopkins was first settled in 1853 and was incorporated as the Village of West Minneapolis in 1893. The name was changed in 1928 to Hopkins after one of the early residents. The original territory of incorporation was three square miles, but successive annexation since 1946 has enlarged this area by one-third.In 1947, the residents of the area adopted a City Charter with a Council/Manager form of government. The governing council is responsible, among other things, for passing ordinances, adopting the budget, appointing committees and hiring the government’s manager and the government’s attorney. The government’s manager is responsible for carrying out the policies and ordinances of the government, for overseeing day- to-day operations of the government and for appointing the heads of the government’s departments. The report includes all funds of the City, including the City’s Housing and Redevelopment Authority (HRA). The City provides a full range of services including general government, public safety, highways and streets, urban redevelopment and housing, culture and recreation, and health and welfare. In addition to general municipal activities, the City provides water, sewer, storm sewer and refuse services and operates an ice arena. Low-income rental housing is a function of the HRA. The Hopkins Fire Relief Association has not met the established criteria for inclusion in the reporting entity, and accordingly is excluded from this report. The annual budget serves as the foundation for the City of Hopkins financial planning and control. All departments of the City of Hopkins are required to submit requests for appropriation to the Finance Director by July of each year. The Finance Director uses these requests as the starting point for developing a proposed budget.The Finance Director then presents this proposed budget to the Council for review prior to September 15th. The Council is required to hold public hearings on the proposed budget and to adopt a final budget no later than December 31, the close of the City of Hopkins fiscal year. The appropriated budget is prepared by fund and department. Department heads may make transfers of appropriations within a department. Transfers of appropriations between funds require approval of the City Council. Budget to actual comparisons are provided in this report for each individual governmental fund for which an annual budget has been adopted. For the General Fund and the major Special Revenue Funds this comparison is presented on pages 37-39 as part of the basic financial statements for the governmental funds. For governmental funds, other than the General fund and major Special Revenue Funds, with annual budgets, this comparison is presented in the combining and individual fund statements and schedules subsection of this report on pages 90-100. Factors Affecting Financial Condition The City of Hopkins, consisting of 2,504 acres, is located in Hennepin County on the westerly fringe of the Minneapolis urban area. The City, as part of the Minneapolis-St. Paul metropolitan complex, is readily accessible by the many highways and railways leading into the area. This easy access prompted steady growth for the City of Hopkins during its formative years. In response to this growth the City developed goals of working towards a planned community, with its policies directed toward sound ratios of residential, commercial and industrial components, with the current tax base approximately 76% single family residential and apartments, and 24% commercial-industrial. The city’s population has stabilized due to the fact that the City is largely developed and the national trend toward the lowering of persons per household. 4 The City Council and staff along with an organized group of concerned partners determined what the Vision and the Mission of the City of Hopkins should be. Participation in this project was very high and the resulting Vision and Mission are as follows: Community Vision Creating a Spirit of Unity – Hopkins will be a community where People are treated with respect People participate in building culture, character and common bonds Business growth throughout the City is supported while maintaining a vibrant City center People feel safe, support outstanding schools and celebrate cultural heritages People enjoy quality public services, parks and housing City of Hopkins Mission Partnering with the Community to enhance the quality of life, Inspire, Educate, Involve, Communicate Economic Condition and Outlook Hopkins continues to show strong economic and redevelopment activities within the city. The valuation of new non-residential construction in 2013 was $36.6 million dollars. This development activity has been the result of a good development market in the Hopkins area along with successful planning on the part of the city council and city staff. Significant projects completed or begun in 2013 include the following: Activity Valuation Commercial Additions/Alterations: Marketplace & Main Townhomes $ 2,500,000 Mayon Plastics site redevelopment $ 3,000,000 BP Gas Station site redevelopment $ 4,000,000 Gallery Flats Apartments $24,000,000 Efforts are being made for continued development and growth for 2014 and beyond. It is anticipated that approximately $149,000,000 of construction will also take place in the City of Hopkins during the next several years. Some anticipated projects for 2014-2017 include the following: Project Valuation Hopkins Cold Storage Site Redevelopment $62,000,000 Fifth Avenue Flats $40,000,000 Johnson Building redevelopment $30,000,000 EBCO Site redevelopment $10,000,000 Oxford Green Apartments $ 7,000,000 Long-term financial planning The City of Hopkins has a strategic plan for economic development and has completed extensive planning work in anticipation of the Southwest Light Rail Transit (SWLRT) line and the three Hopkins LRT stations. As a part of the plans, the City of Hopkins intends to pursue various development and redevelopment efforts throughout the City. Several projects are anticipated. 5 In 2014, projects being completed include the redevelopment of the Park Nicollet Clinic site into a retail/housing development of 163 housing units and Phase II of Market Place & Main project with the addition of townhomes. These developments will have major impacts on the community. Specialized planning is taking place to ensure that these developments occur so as to benefit the community and residential neighborhoods. Major improvements continue to be made along the Hopkins section of Excelsior Boulevard (County Road 3). The first phase of improvements occurred in 1998 - 2000 between Shady Oak th Road and 9 Avenue South. The second phase occurred in 2002 – 2004 between Highway 169 and Blake Road. The third phase occurred in 2007 on the segment between Highway 169 and th 8 Avenue. The final phase is the section from Blake Road to Meadowbrook Road, has provisional county funding and is tentatively scheduled for 2016-2017. Significant improvements are in the planning stage for Shady Oak Road (County Road 61). This project is a joint effort between Hennepin County and the Cities of Minnetonka and Hopkins. A number of neighborhood and town meetings have been held to gather input on this project that is projected to re-align the road and facilitate re-development of the area. The project began in earnest in 2013 with the acquisition of right of way property with major road construction starting in 2014 and finishing in 2015. Another project in the planning stages is the 14-mile Southwest Corridor Light Rail Transit (SWLRT) line that will go from Eden Prairie to downtown Minneapolis passing through Hopkins and providing development potential at three transit stations that are planned for Hopkins. In downtown Minneapolis the Southwest LRT will connect with the Hiawatha and Central LRT lines. Construction of the light rail line is expected to begin in 2015 and is expected to be funded with the Counties Transit Improvement Board’s transit sales tax in the metro area (30%), and with Hennepin County Regional Railroad Authority (10%), Federal (50%), and State (10%) dollars. Relevant Financial Policies The City of Hopkins has adopted a comprehensive set of financial policies. During the current year, the City revised the conduit debt policy into a new private activity bond policy. This policy sets forth guidelines for the issuance of bonds for private development of multi-family housing projects which use the city's bonding authority to receive lower interest rates. In addition the City of Hopkins’ Fund Balance policy requires that the General Fund’s Unassigned portion of fund balance be equivalent to a minimum of five months expenditures or 42% of the prior fiscal year General Fund operating expenses. At December 31, 2013 the General Fund unassigned fund balance is at 44.1% or $4,823,141 which represents slightly more than five months expenditures of the 2014 budget. Due to sound fiscal policy and close monitoring of budgets we remain at the targeted General Fund balance goal. Major Initiatives For 2013, the staff, following specific directives of the council and the city manager, has been involved in a variety of projects throughout the year. These projects reflect the government’s commitment to ensuring that its citizens are able to live and work in a safe environment and that the needs for services are met. In 2013, we accomplished our annual street repair and improvements, at a cost of approximately $2,050,000. This included the Presidential Avenue South neighborhood, a two year project done 6 in one as a result of favorable bids. In addition preliminary work was begun on the 2014 street improvement project. The sewer department began sewer improvements to Cottageville Park at a cost of $119,400 and the water, sewer and storm sewer departments also completed in conjunction with the street improvements, infrastructure reconstruction projects totaling $1,512,000. Other miscellaneous improvement projects in 2013 included kitchen upgrade at the Activity Center at a cost of $28,500, various city park improvements at a total cost of $120,158, and building controls upgrade at a cost of $24,725 along with other smaller projects. Future projects A systematic citywide sidewalk rehab program was initiated in 1992. Each year one quadrant is inspected and necessary repairs made. A sidewalk/trail plan was developed and implemented in 2003, which guides future improvements and connections to regional trails. The City has established a street reconstruction and storm sewer program based on a street condition survey and storm water management program. The streets found in poor condition and future problem streets will be systematically included for repairs in the five-year Capital Improvement Plan. Certificate of Achievement For Excellence in Financial Reporting The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial reporting to the City of Hopkins for its comprehensive annual finance report for the fiscal year ended December 31, 2012. In order to be awarded a Certificate of Achievement for Excellence in Financial Reporting, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both U.S. generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only.We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments We wish to express our appreciation to the Mayor and City Council for their continued interest and support in planning and conducting the financial operations of the City in a responsible and progressive manner. We also want to express our appreciation to the Finance Department staff for their work in preparing this report. Respectfully submitted, Michael J. Mornson Christine M. Harkess, CPA, CGFM City Manager Finance Director 7 8 Organizational Chart CITIZENS CITY Boards & City Attorney COUNCIL Commissions AdministrativeCenter for the City Manager ServicesArts City of Minnetonka Community FinanceFireRecreation Services AssessingFire & MedicalDepot Coffee Accounting City ClerkResponseHouse Payroll CommunicationsPrevention Utility Billing InformationEmergency ServicesPreparedness Inspections Reception Activity Center Planning & EconomicPolicePublic Works Development Economic Building Maint. & Patrol Development Equipment Services Investigation Housing Engineering Communication Planning & Parks & Forestry Crime Zoning Street/Traffic/Refuse Prevention Public Housing Water & Sewer Pavilion/Ice Arena 9 THE CITY OF HOPKINS, MINNESOTA COMPREHENSIVE ANNUAL FINANCIAL REPORT CITY OFFICIALS December 31, 2013 CITY COUNCIL Term Expires Eugene Maxwell Mayor 12-31-15 Molly Cummings Councilmember 12-31-15 Jason Gadd Councilmember 12-31-15 Kristi Halverson Councilmember 12-31-17 Cheryl Youakim Councilmember 12-31-17 CITY MANAGER Michael J. Mornson Appointed FINANCE DIRECTOR Christine M. Harkess Appointed 10 CITY OF HOPKINS, MINNESOTA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2013 SECTION II FINANCIAL SECTION 11 INDEPENDENT AUDITORS' REPORT Honorable Mayor and Members of the City Council City of Hopkins, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business- type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins (the City), as of and for the year ended December 31, 2013, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. An independent member of Nexia International 12 Honorable Mayor and Members of the City Council City of Hopkins Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of December 31, 2013, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund and major special revenue funds for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis and the schedule of funding progress, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary and Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City’s basic financial statements. The introductory section, combining and individual nonmajor fund statements and schedules and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual fund statements and schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have 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 them. 13 Honorable Mayor and Members of the City Council City of Hopkins Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 10, 2014, on our consideration of the City's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance. CliftonLarsonAllen LLP Minneapolis, Minnesota June 10, 2014 14 CITY OF HOPKINS, MINNESOTA MANAGEMENT’S DISCUSSION AND ANALYSIS (Unaudited) This section of the City’s comprehensive annual financial report presents a discussion and analysis of the City’s financial activities during the fiscal year ended December 31, 2013. This discussion and analysis should be read in conjunction with the letter of transmittal in the introductory section of this report. Financial Highlights The assets of the City of Hopkins exceeded liabilities by approximately $69.3 million. Of this amount, (unrestricted net position), approximately $12.4 million may be used to meet the City’s ongoing obligations to citizens and creditors. The City’s total net position increased by approximately $2.2 million. As of the close of the current fiscal year, the City of Hopkins governmental funds reported combined ending fund balances of approximately $16.5 million, a decrease of approximately $(2.1) million in comparison with the prior year. The decrease was primarily due to payment on refunded bonds and use of fund balance for construction projects. Approximately $6.6 million of fund balance is available for spending at the City’s discretion (assigned or unassigned fund balance). As of December 31, 2013, unassigned fund balance for the General Fund was approximately $4.8 million, or 45% of total general fund expenditures. The City of Hopkins total debt decreased by approximately $150 thousand during the current fiscal year due to the net effect of the refunding payment of the 2002A tax increment redevelopment bonds and the 2013A bond sale for street improvements. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the City of Hopkins basic financial statements. The City of Hopkins basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the City of Hopkins finances, in a manner similar to a private-sector business. The statement of net position presents information on all of the City of Hopkins assets, deferred outflows of resources and liabilities, with the difference between them reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City of Hopkins is improving or deteriorating. The statement of activities presents information showing how the City net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). 15 Both of the government-wide financial statements distinguish functions of the City of Hopkins that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City of Hopkins include general, public safety, highways, streets, culture, recreation, urban redevelopment, housing, health and welfare. The business-type activities of the City of Hopkins include water, sewer, refuse, storm sewer utilities, an ice arena, and a housing and redevelopment authority. The government-wide financial statements include the City of Hopkins itself, but also a legally separate Hopkins Housing and Redevelopment Authority. Although the Hopkins Housing and Redevelopment Authority is legally separate, it functions for all practical purposes as a department of the City of Hopkins, and therefore has been included as an integral part of the primary government. The government-wide financial statements can be found on pages 28-29 of this report. Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City of Hopkins, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City of Hopkins can be divided into two categories: governmental funds and proprietary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a City’s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the City’s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City of Hopkins maintains thirty-five individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, Economic Development, Arts Center, 2009B Housing Improvement Bonds of 1999A Refunding Bonds, 2009B Housing Improvement Bonds of 1999B Refunding Bonds, Municipal State Aid Construction, and Permanent Improvement Revolving fund all of which are considered to be major funds. Data from the other twenty-eight funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report. The City of Hopkins adopts an annual appropriated budget for its general fund and all of its special revenue funds except for the Community Development Block Grant fund. A budgetary comparison 16 statement has been provided for the General fund and major special revenue funds and schedules are provided for other funds to demonstrate compliance with the budget. The basic governmental fund financial statements can be found on pages 30-39 of this report. Proprietary funds. The City of Hopkins maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City of Hopkins uses enterprise funds to account for its water, sewer, refuse, storm sewer utilities, the pavilion ice arena, and the housing and redevelopment authority. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City of Hopkins various functions. The City of Hopkins uses internal service funds to account for replacement of equipment, insurance deductibles and compensated absences. Because all of these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the water, sewer, storm sewer utility funds, all of which are considered to be major funds of the City of Hopkins. Data from the other three enterprise funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major proprietary funds is provided in the form of combining statements elsewhere in this report. The internal service funds are combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is also provided in the form of combining statements elsewhere in this report. The basic proprietary fund financial statements can be found on pages 40-44 of this report. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 46-69 of this report. Other Information In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information. Required supplementary information can be found on page 71 of this report. The combining statements referred to earlier in connection with non-major governmental funds, non- major proprietary funds and internal service funds are presented immediately following the required supplementary information. Combining and individual fund statements and schedules can be found on pages 74-108 of this report. Government-Wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government’s financial position. In the case of the City of Hopkins, assets exceeded liabilities by $69,346,353 at the close of the most recent fiscal year. 17 Approximately two thirds (67%) of the City of Hopkins net position is reflected in its investment in capital assets (e.g., land, buildings, machinery and equipment); less any related debt used to acquire those assets that are still outstanding. The City of Hopkins uses these capital assets to provide services to citizens. The net capital assets are not available for future spending. Although the City of Hopkins investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources. City of Hopkins Net Position December 31 Governmental Activities Business-Type Activities Total 2013 2012 2013 2012 2013 2012 Assets Current and other assets $ 26,492,632 $ 27,970,866 $ 3,655,687 $ 2,937,340 $ 30,148,319 $ 30,908,206 Capital assets 50,841,438 47,524,794 22,101,134 21,060,724 72,942,572 68,585,518 Total assets 77,334,070 75,495,660 25,756,821 23,998,064 103,090,891 99,493,724 Deferred Outflows of Resources Deferred charges on refunding 349,800 386,857 - - 349,800 386,857 Liabilities Other liabilities 3,346,837 2,079,463 406,259 300,911 3,753,096 2,380,374 Long-term liabilities outstanding 24,078,397 25,372,537 6,259,967 5,029,422 30,338,364 30,401,959 Total liabilities 27,425,234 27,452,000 6,666,226 5,330,333 34,091,460 32,782,333 Net Position Net investment in capital assets 30,666,268 31,891,229 16,621,198 16,405,495 47,287,466 48,296,724 Restricted 10,014,203 8,684,347 - - 10,014,203 8,684,347 Unrestricted 9,575,287 7,854,941 2,469,397 2,262,236 12,044,684 10,117,177 Total net position $ 50,255,758 $ 48,430,517 $ 19,090,595 $ 18,667,731 $ 69,346,353 $ 67,098,248 A portion of the City of Hopkins net position represent resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net position ($12,044,684) may be used to meet the government’s ongoing obligations to citizens and creditors. At the end of the current fiscal year, the City of Hopkins is able to report positive balances in all three categories of net position, both for the government as a whole, as well as for its governmental and business-type activities. The City’s net position increased by $2,248,105 during the current fiscal year. (remainder of page is left blank intentionally) 18 Governmental and business-type activities. Governmental activities increased the City of Hopkins net position by $1,825,241 and business-type activities increased net position by $422,864. Key elements of the increases are as follows: City of Hopkins Changes in Net Position For the Year Ended December 31 Governmental Activities Business-Type Activities Total 2013 2012 2013 2012 2013 2012 Revenues: Programrevenues: Charges for services $ 1,146,136 $ 1,021,021 $ 5,520,903 $ 5,572,013 $ 6,667,039 $ 6,593,034 Operating grants and contributions 5,273,474 3,499,465 561,111 698,769 5,834,585 4,198,234 Capital grants and contributions 1,775,717 1,350,147 144,076 206,681 1,919,793 1,556,828 General revenues: Property taxes 10,565,115 10,354,188 - - 10,565,115 10,354,188 Tax increments 2,002,607 2,332,863 - - 2,002,607 2,332,863 Grants and contributions not restricted 21,152 20,724 - - 21,152 20,724 Investment earnings 105,213 76,762 18,788 9,040 124,001 85,802 Net increase (decrease) in fair value of investments (129,970) 29,542 (22,449) 760 (152,419) 30,302 Gain on sale of capital assets 34,651 38,427 21,855 8,000 56,506 46,427 Total revenues 20,794,095 18,723,139 6,244,284 6,495,263 27,038,379 25,218,402 Expenses: General government 2,108,141 2,056,756 - - 2,108,141 2,056,756 Public safety 6,357,722 6,382,270 - - 6,357,722 6,382,270 Health and welfare 165,649 136,528 - - 165,649 136,528 Highways and streets 5,845,437 3,226,807 - - 5,845,437 3,226,807 Urban redevelopment and housing 2,000,868 2,362,030 - - 2,000,868 2,362,030 Culture and recreation 1,857,743 1,726,812 - - 1,857,743 1,726,812 Interest on long-term debt 778,294 811,914 - - 778,294 811,914 Water - - 1,384,116 1,365,542 1,384,116 1,365,542 Sewer - - 1,991,274 1,816,058 1,991,274 1,816,058 Storm sewer - - 440,459 451,659 440,459 451,659 Refuse - - 819,715 862,286 819,715 862,286 Pavilion/ice arena - - 425,813 430,082 425,813 430,082 Housing and redevelopment authority - - 615,043 563,863 615,043 563,863 Total expenses 19,113,854 16,703,117 5,676,420 5,489,490 24,790,274 22,192,607 Increase in net position before 1,680,241 2,020,022 567,864 1,005,773 2,248,105 3,025,795 transfers Transfers 145,000 145,000 (145,000) (145,000) - - Increase in net position 1,825,241 2,165,022 422,864 860,773 2,248,105 3,025,795 Net position - January 1 48,430,517 46,265,495 18,667,731 17,806,958 67,098,248 64,072,453 Net position - December 31 $ 50,255,758 $ 48,430,517 $ 19,090,595 $ 18,667,731 $ 69,346,353 $ 67,098,248 19 Governmental activities: Property taxes increased in 2013 as a result of debt service levies and increased operating costs. The City also received a number of program grants for specific programs in addition to state municipal aid for a major street improvement project. Net position increased primarily due to conservative spending, grants for public safety & development activities and increased fee and license revenue. 20 Business-type activities. Business-type activities had an increase in net position due to an ongoing effort to ensure that rates are adequate to fund all expenditures. A utility master plan was developed in 2007 with scheduled rate increases that are designed to cover operations, debt and capital needs over the next 15 years. As a result the utility funds are in a stronger financial position than they were a couple years ago. 21 Financial Analysis of the City’s Funds As noted earlier, the City of Hopkins uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City of Hopkins governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources.Such information is useful in assessing the City of Hopkins financing requirements. In particular, unassigned fund balance may serve as a useful measure of a City’s net resources available for spending at the end of the fiscal year. As of the end of the current fiscal year, the City of Hopkins governmental funds reported combined ending fund balances of $16,493,325, a decrease of $(2,105,520) in comparison with the prior year. The key factor of the decrease is the payment of project costs on the Shady Oak Road reconstruction project and payment on refunded bonds. Approximately 40% of fund balance or $6,551,781, constitutes assigned and unassigned fund balance, which is available for spending at the City’s discretion. The remainder of fund balance is non- spendable, restricted or committed to indicate that it is not available for new spending because it is either in a non-spendable form (inventory, prepaid expenses, rehabilitative loans, or property held for resale); restricted (debt service, tax increment projects) or has already been committed (for economic development, property purchases, parking, and communication activities). The general fund is the chief operating fund of the City of Hopkins. At the end of the current fiscal year, unassigned fund balance of the general fund was $4,823,141. This represents 88.0% of the general fund’s total fund balance. As a measure of the general fund’s liquidity, it may be useful to compare both unassigned fund balance and total fund balance to total fund expenditures. Unassigned fund balance represents approximately 44.8% of total general fund expenditures while total fund balance represents approximately 50.9% of that same amount. The fund balance of the City of Hopkins general fund increased by $287,374 during the current fiscal year. Revenues exceeded expenditures by $320,954 before transfers. This increase was a result of conservative spending and an increase in public safety program grants for specific programs. The Economic Development fund has a total fund balance of $3,839,261 of which $1,050 is non- spendable and $2,198,283 is committed for economic development. The fund balance increased by $158,198 primarily as a result of an increase in the tax levy and conservative spending. The Arts Center fund has a total fund balance of ($1,089,972) of which $135 is nonspendable and ($1,090,107) is unassigned. The fund balance deficit decreased by $19,627 as the Arts Center received a programming grant from the Minnesota State Arts Board. Staff and the Friends of the Hopkins Center for the Arts, a non-profit associated with the Arts Center, continue working to identify significant donors and corporate sponsors to underwrite arts programming and decrease the deficit. The 2009B Housing Improvement refunding bonds of 1999A bond fund has a total fund balance of $318,668, all of which is restricted for the payment of debt service. The fund balance increased by $32,098 as special assessment revenues exceeded current debt payment requirements. The 2009B Housing Improvement refunding bonds of 1999B bond fund has a total fund balance of $593,114, all of which is restricted for the payment of debt service. The fund balance increased by $47,733 as special assessment revenues exceeded current debt payment requirements. 22 The Municipal State Aid Construction fund has a total fund balance of $467,787 which is assigned for construction projects. The fund balance decreased by $(1,596,361) as a result of project payments on the Shady Oak Road reconstruction project. The Permanent Improvement Revolving fund has a total fund balance of $2,341,089 which is assigned for construction projects. The fund balance decreased by $(48,613) as a result of the 2013 bond sale and related project costs for the South Presidential neighborhood street reconstruction project. Revenues in this fund are derived from special assessments and taxes. Proprietary funds. The City of Hopkins proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. Unrestricted net position of the Water fund at the end of the year amounted to $213,543. The unrestricted net position is used to pay for infrastructure improvements. The increase in net position amounted to $121,161 and is due to operating revenues exceeding operating expenses. A utility master plan was prepared in 2007 to address the funding shortage and prepare a rate structure that will sustain the water fund in addition to providing for future capital expenditures. The new rate structure which calls for modest annual increases in water rates was implemented in 2008 and along with conservative spending we are seeing the results of the study impacting the water funds financial status. Unrestricted net position of the Sewer fund at the end of the year amounted to $242,211. The unrestricted net position will be used to pay for infrastructure improvements. The increase in net position amounted to $8,242 and is due to operating revenues exceeding operating expenses. A utility master plan was prepared in 2007 to address the funding shortage and prepare a rate structure that will sustain the sewer fund in addition to providing for future capital expenditures. The new rate structure which calls for modest annual increases in sewer rates was implemented in 2008 and along with conservative spending we are seeing the results of the study impacting the sewer funds financial status. Unrestricted net position of the Storm Sewer Utility fund at the end of the year amounted to $883,733. The unrestricted net position will be used to pay for infrastructure improvements. The growth in net position amounted to $237,427 and is due to operating revenues exceeding operating costs. General Fund Budgetary Highlights The difference between the general fund original budget and the final amended budget resulted in departmental budget changes but did not increase the total expenditure budget when transfers out are included. The reason for the inter-departmental amendments was a transfer between expenditure categories to match actual expenditures. The budget changes can be summarized as follows: Several departments had small budget modifications, however when departments were combined for reporting purposes the budget changes balanced out and no change was noted. During the year revenues were over budgetary estimates by $516,498 due to increases in license and permit revenue, fines, federal grants, recreation fees and donations. This was offset by a decrease in tax revenues, interest income and miscellaneous items. Expenditures were over budget by $(229,124) and was due to increased personnel costs in the fire department as a result of the fire prevention and safety grant inspection program, increased costs in the public works department as a result of increased snow removal costs, and increased costs in culture and recreation as a result of increases in programming 23 The net effect of these budget impacts was a net budgetary increase in fund balance of $287,374 after transfers. Capital Asset and Debt Administration Capital assets. The City of Hopkins investment in capital assets for its governmental and business type activities as of December 31, 2013, amounts to $72,942,572 (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements, vehicles, machinery and equipment, park facilities, roads, highways, bridges, distribution systems and construction in progress. Major capital asset events during the current fiscal year included the following: Construction in progress additions totaled $5,835,927 for infrastructure projects. A total of $2,188,965 of assets was transferred from construction in progress to other improvements as infrastructure projects were completed and put into service. Vehicle and equipment purchases totaled $756,998. Major purchases included public works equipment, public safety vehicles and equipment. Vehicle and equipment deletions totaled $150,400. Deletions were a result of scheduled replacements of public works, public safety vehicles and equipment. City of Hopkins Capital Assets (net of depreciation) December 31 Governmental Activities Business-Type Activities Total 2013 2012 2013 2012 2013 2012 Land $ 5,805,711 $ 5,805,711 $ 228,463 $ 228,463 $ 6,034,174 $ 6,034,174 Buildings 14,342,478 14,837,699 3,514,530 3,643,644 17,857,008 18,481,343 Infrastructure - - 7,748,760 8,095,435 7,748,760 8,095,435 Improvements 22,929,495 21,985,176 8,229,312 7,934,815 31,158,807 29,919,991 Vehicles 2,104,954 1,616,141 322,327 383,623 2,427,281 1,999,764 Equipment 1,470,865 1,465,495 205,936 196,538 1,676,801 1,662,033 Construction in progress 4,187,935 1,814,572 1,851,806 578,206 6,039,741 2,392,778 $ 50,841,438 $ 47,524,794 $ 22,101,134 $ 21,060,724 $ 72,942,572 $ 68,585,518 Additional information on the City of Hopkins capital assets can be found in note 5 on pages 57-58 of this report. Long-term debt. At the end of the current fiscal year, the City of Hopkins had total bonded debt outstanding of $28,805,000. Of this amount $1,890,000 comprises tax increment redevelopment debt, and $18,110,000 comprises general obligation and special assessment debt, all of which is backed by the full faith and credit of the government. Another $2,830,000 is special fees debt for which the government is liable in the event of default by the property owners subject to the fees. The remainder of the City of Hopkins debt, $5,975,000, represents bonds secured solely by specified revenue sources (i.e., revenue bonds). 24 City of Hopkins Outstanding Debt General Obligation and Revenue Bonds December 31 Governmental Activities Business-Type Activities Total 2013 2012 2013 2012 2013 2012 G.O. Tax increment bonds $ 1,890,000 $ 3,590,000 $ -$ - $ 1,890,000 $ 3,590,000 G.O. Housing fee bonds 2,830,000 3,175,000 - - 2,830,000 3,175,000 G.O. Equipment certificates 740,000 795,000 - - 740,000 795,000 G.O. Capital improvement bonds 8,695,000 9,385,000 - - 8,695,000 9,385,000 G.O. Special assessment bonds 8,675,000 7,230,000 - - 8,675,000 7,230,000 Revenue bonds - - 5,975,000 4,780,000 5,975,000 4,780,000 $ 22,830,000 $ 24,175,000 $ 5,975,000 $ 4,780,000 $ 28,805,000 $ 28,955,000 The City of Hopkins total bonded debt decreased by $150,000 or .05% during the current fiscal year. The decrease is a result of the combination of debt payments totaling $3,800,000 which included a bond call payment of $1,605,000 and the issuance of $3,650,000 in G.O. Improvement Bonds that financed street, water, sewer and storm sewer infrastructure improvements in the South Presidential neighborhood. General Obligation Bonds are backed by the full faith, credit and taxing power of the City, and are serviced by General and Tax Increment levies and also by fees assessed against benefited properties. Revenue Bonds are backed by the full faith, credit and taxing power of the City, and are serviced by the Water, Sewer, and Storm Sewer Utility Funds and the Pavilion Fund current revenues. City Special Assessment Bonds are backed by the full faith, credit and taxing power of the City, and repayment monies are generated by the collection of special assessments and general levies. The City is subject to a statutory limit of bonded indebtedness equaling 3.0 percent of taxable market value. At December 31, 2013, the debt limit for the City is $46,161,361. Of the total debt, $9,435,000 of general obligation and revenue bonds is applicable to the limit. The legal debt margin is $36,726,361. The City of Hopkins was upgraded to a “AA+” rating from Standard & Poor’s in January 2014 and maintains an “A1” rating from Moody’s. Additional information on the City of Hopkins long-term debt can be found in note 9 on pages 60-63 of this report. Economic Factors and Next Year’s Budgets and Rates A number of factors were taken into consideration when preparing the City of Hopkins 2014 budget. Utility charges were reviewed and as a result of the utility master plan, rates for the water and sewer will be increased by modest amounts annually at least through 2017. The tax capacity rate increased as a result of economic conditions. Property values are starting to increase and this was taken into consideration when determining estimated tax revenues. Also taken into consideration is that the City’s population would remain constant. In addition during late 2012 the City transferred its dispatch operation to the County which results in an annual savings of approximately $300,000. This savings 25 has helped keep the budget down for 2014. As a result of these factors the City prepared a budget for 2014 that included an overall increase of 3.46% in expenditures. During the current fiscal year, unassigned fund balance in the general fund increased to $4,823,141 or 45% of general fund expenditures. The Office of the State Auditor recommends unassigned fund balances no less than five months of operating expenditures. The City is meeting the recommendation for the general fund. The unassigned fund balance is used to pay for the City’s general fund obligations until it receives its property tax levy revenues in June. Requests for Information This financial report is designed to provide a general overview of the City of Hopkins finances for all those with an interest in the government’s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Finance Director, City of Hopkins, 1010 First Street South, Hopkins, MN 55343. 26 BASIC FINANCIAL STATEMENTS 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 NOTES TO THE FINANCIAL STATEMENTS 45 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS December 31, 2013 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES The City of Hopkins, Minnesota (the City) is a charter City, which was approved December 2, 1947. The City operates pursuant to applicable Minnesota laws and statutes. The governing body of the City is a Council – Manager form of government. The financial statements of the City have been prepared in conformity with U.S. generally accepted accounting principles as applied to governmental units by the Government Accounting Standards Board (GASB). The more significant accounting policies of the City are described below. A. REPORTING ENTITY In accordance with GASB pronouncements, the City’s financial statements include all funds and departments of the City and its component units, for which the City is considered to be financially accountable. A blended component unit, although legally separate entity is, in substance, part of the City’s operations and so data from this unit is combined with data of the primary government. The City’s blended component unit has a March 31 year-end, however when blended with the City it is shown with a December 31 year-end. Blended Component Unit Housing and Redevelopment Authority in and for the City of Hopkins (HRA) The HRA was created by the City to carry out certain redevelopment projects and low-income rental housing. Individuals on the City Council represent the governing board of the HRA. The housing activity is supported in part by federal subsidies. There is an extensive trust agreement between the HRA and HUD regarding the facility. The HRA is included in the City’s enterprise funds. Separate financials are not prepared. B. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS The government-wide financial statements (i.e., statement of net position and the statement of changes in net position) report information on all activities of the primary government and its component units. The interfund services provided and used are not eliminated in the process of consolidation. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. Unbilled utility service receivables are recorded at year-end. 46 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Governmental funds are accounted for using the current financial resources measurement focus and the modified accrual basis of accounting. Their revenues are recognized when susceptible to accrual (i.e., when they become measurable and available). “Measurable” means the amount of the transaction can be determined and “available” means collectible within the current period or within sixty days thereafter to be used to pay liabilities of the current period. Major revenues that are susceptible to accrual include property taxes, special assessments, intergovernmental revenues, charges for services, and investment earnings. Major revenues that are not susceptible to accrual include fees and miscellaneous revenues; such revenues are recorded only as received because they are not measurable until collected. Expenditures are generally recognized under the modified accrual basis of accounting when the related fund liability is incurred, except for principal and interest on general long-term debt and compensated absences that are recognized when due and payable. The City reports the following major governmental funds: Thegeneral fund is the primary operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. Theeconomic development special revenue fund accounts for development opportunities of the city. Sources of funds are derived from the administration of loans and an annual tax levy. Thearts center special revenue fund accounts for the activities of the Hopkins Center for the Arts. Sources of funds are derived from leases, ticket sales, admission fees, grants and donations The2009B taxable housing improvement bonds of 1999A refunding bond debt service fund accounts for resources accumulated and payments made for principal and interest on long-term debt issued to pay for Valley View Home improvements. The owners of these town homes pay an annual fee, which in turn pays for the bond issue. The2009B taxable housing improvement bonds of 1999B refunding bond debt service fund accounts for resources accumulated and payments made for principal and interest on long-term debt issued to pay for Westbrook Patio Home improvements. The owners of these town homes pay an annual fee, which in turn pays for the bond issue. Themunicipal state aid construction fund accounts for the City's allocation of the state collected highway user tax. The allocation is based on population and need for construction of designated state aid streets in the City. Thepermanent improvement revolving capital projects fund accounts for resources and accumulated payments for street improvements funded with bonds and special assessments levied on benefited property. The City reports the following major proprietary funds: Thewater utility fund accounts for the operations of the City-owned water distribution system. The water bonds of 2009A, 2012B and 2013A are included as part of this fund since revenues of the water fund are pledged to pay principal and interest on this bond. Thesewer utility fund accounts for the operations of the City-owned sewer lift stations and disposal system. The sewer bonds of 2009A, 2012B and 2013A are included as part of this fund since revenues of the sewer fund are pledged to pay principal and interest on this bond. Thestorm sewer utility fund accounts for the operations and improvements of the storm water drainage system. The storm water bond issues of 2009A, 2010B, 2012B and 2013A are included as part of this fund since revenues of the storm sewer fund are pledged to pay principal and interest on these bonds. 47 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Additionally, the City reports the following fund types: Governmental Funds Special Revenue Funds - Special revenue funds are used to account for the proceeds of specific revenue sources that are legally restricted or committed by Council to expenditures for specified purposes. Debt Service Funds - Debt service funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest, and related costs. Capital Project Funds - Capital project funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities and infrastructure, other than those financed by proprietary funds or special revenue funds. Proprietary Funds Enterprise Funds - Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis, be financed or recovered primarily through user charges. Internal Service Funds – Internal service funds are used to account for the financing of goods and services provided by one department to other departments of the City on a cost-reimbursement basis. Internal service funds are used for equipment replacement, insurance deductions and employee benefits. As a general rule the effect of interfund activity has been eliminated from the government-wide financial statements, however interfund services provided and used are not eliminated in the process of consolidation. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the City enterprise funds and internal service funds are charges to customers for sales and service. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City’s policy to use restricted resources first, and then use unrestricted resources as they are needed. D. CASH AND INVESTMENTS Cash balances from all funds are combined and invested to the extent available in authorized investments pursuant to Minnesota Statutes (see note 4). Earnings from such investments are allocated to the respective funds on the basis of applicable cash balance participation by each fund. Investments in certificates of deposit and commercial paper with a maturity date of less than one year at the date of purchase are reported at cost or amortized cost, which approximates fair value. Investments other than commercial paper held longer than one year are reported at fair value, based on quoted market prices. The City accounts for its cash, cash equivalents and investments in an entity-wide cash management pool, which is used essentially as a demand deposit account. For purposes of the statement of cash flows, the proprietary 48 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 funds consider all investments to be cash equivalents. Restricted cash and investments are reported separately on the financial statement. E. INTERFUND RECEIVABLES/PAYABLES Activity between funds that is representative of lending/borrowing arrangements and transactions between funds that are outstanding at the end of the fiscal year are referred to “due to/from other funds” Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as “internal balances.” The non-current portion of due from other funds is offset by nonspendable fund balance in the general fund to indicate that this portion of fund balance is not available for appropriation and is not expendable available financial resources. F. INVENTORIES AND PREPAID ITEMS All inventories are accounted for using the consumption method and are valued at cost using the first-in/first-out (FIFO) method. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements. Prepaid items are reported using the consumption method and recorded as expenditures/expenses at the time of consumption. G. CAPITAL ASSETS Capital assets, which include land, buildings, equipment and infrastructure assets (e.g., roads, bridges, curbs and gutters, streets and sidewalks, drainage systems, lighting systems, and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements and the proprietary fund financial statements. The City defines capital assets as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of three years. Such assets are recorded at historical cost. Donated capital assets are recorded at estimated fair market value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Assets not being depreciated include land and construction in progress. Buildings, equipment, and infrastructure of the City and the HRA are depreciated using the straight-line method over the estimated useful lives as follows: Buildings 30 - 40 years Mains and Lines 40 - 50 years Streets 20 - 25 years Improvements 10 - 20 years Vehicles 3 - 30 years Equipment 3 - 20 years H. COMPENSATED ABSENCES The City compensates all employees upon termination for unused vacation or flex leave. Employees hired prior to August 1, 1998 may opt to have sick leave, at the rate of 8 hours for each calendar month of full-time service, instead of flex leave. Employees hired prior to August 1, 1998, that have not opted for flex leave, shall be entitled to severance pay, after completion of five years of continuous City employment. Severance pay is calculated by multiplying the total number of continuous years in the City employ and/or accumulated sick leave by the daily wage rate prevailing at date of severance, at one day per year of such employment, to a maximum of 20 days. Such 49 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 severance money shall be paid in case of separation caused by death, eligible retirements, or medically attested disability preventing an employee from performing the major duties of the position or separation for non- disciplinary reasons. Accumulated vacation, flex and vested severance pay is reported as an expense and an accrued liability as the benefits accrue to employees in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in the governmental funds only if benefits have matured as a result of employee resignations and retirements. The employee benefits internal service fund reports the governmental funds’ liability for compensated absences on the accrual basis. I. LONG-TERM OBLIGATIONS In the government-wide financial statements, and proprietary fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net position. Bond premiums and discounts, amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount. In the governmental fund financial statements bond premiums and discounts, as well as bond issuance costs are recognized during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. J. NET POSITION/FUND EQUITY Net position represents the difference between assets and liabilities in the government-wide financial statements. Net position invested in capital assets consists of capital assets net of accumulated depreciation, reduced by the outstanding balance of any long-term debt used to build or acquire the capital assets. Net position is reported as restricted in the government-wide financial statements when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments. In the fund financial statements, governmental funds report fund balances in classifications that disclose constraints for which amounts in those funds can be spent. These classifications are as follows: Nonspendable – portions of fund balance related to prepaids, inventories, long-term receivables, and land held for resale. Restricted – funds are constrained by external parties (statute, grantors, bond agreements, etc.). Committed – fund constraints are established and modified by a resolution approved by the City Council. Assigned – consists of internally imposed constraints. These constraints are established by the City Council and/or management. The City Council also delegates the authority to assign fund balance to the Finance Director per City Legislative Policy 6-G, Fund Balance. Unassigned – is the residual classification for the General Fund and also reflects negative residual amounts in other funds. When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, it is the City’s policy to use restricted first, then unrestricted fund balance. When an expenditure is incurred for purposes for which committed, assigned, and unassigned amounts are available, it is the City’s policy to use committed first, then assigned, and finally unassigned amounts. 50 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 The City formally adopted a fund balance policy for the General Fund. The policy establishes an unassigned fund of a minimum of 5 months or 42% of the previous year’s budgeted expenditures. K. INTERFUND TRANSACTIONS Inter-fund services provided and used are accounted for as revenues and expenditures. Transactions that constitute reimbursements to a fund for expenditures initially made from it that are properly applicable to another fund are recorded as expenditures in the reimbursing fund and as reductions of expenditures in the fund that is reimbursed. All other interfund transactions are reported as transfers. L. PROPERTY TAXES Property tax levies are set by the City Council in December of each year, and are certified to Hennepin County (the County) for collection in the following year. In the State of Minnesota, counties act as collection agents for all property taxes. The County spreads all levies over assessable property. Such taxes become a lien on January 1 and are recorded as receivables by the City at that date. Real property taxes are payable by taxpayers in two equal installments, on May 15 and October 15. Personal property taxes are also payable by taxpayers in two equal installments, on February 28 and June 30. The County provides tax settlements to cities and other local governments three times a year, on or before January 25, July 5 and December 5. In the governmental fund financial statements property taxes are accrued and recognized as revenue for collections within 60 days of year-end. Taxes that remain unpaid at the County on December 31 are classified as delinquent taxes receivable, and are fully offset by deferred inflows of resources because they are not available to finance current expenditures. No allowance for uncollectible taxes has been provided because such amounts are not expected to be material. M. CONDUIT DEBT OBLIGATIONS From time to time, the City has issued Commercial Development Revenue Notes/Bonds in accordance with the Minnesota Municipal Industrial Development Act. These obligations are issued to provide financial assistance to private-sector entities for the acquisition and construction of industrial and commercial facilities deemed to be in the public interest. The obligations are secured by the property financed and are payable solely from payments received on the underlying mortgage loans. Upon repayment of the obligations, ownership of the acquired facilities transfers from the bond holder to the private-sector entity served by the debt issuance. Neither the City, the State, nor any political subdivision thereof is obligated in any manner for repayment of the obligations. Accordingly, the bonds are not reported as liabilities in the accompanying financial statements. As of December 31, 2013, there were 9 notes/bond issues outstanding, with an aggregate principal amount payable of approximately $33.3 million. N. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 51 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 2. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUND BALANCE SHEET AND THE GOVERNMENT-WIDE STATEMENT OF NET POSITION The governmental fund balance sheet includes a reconciliation between fund balance – total governmental funds and net position – governmental activities as reported in the government-wide statement of net position. One element of that reconciliation explains that long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. Details of this difference are as follows: Bonds payable $ 22,826,296 Accrued interest payable 300,398 Net OPEB obligation 191,488 Net adjustment to reduce fund balance - total governmental funds to arrive at net position - governmental activities $ 23,318,182 B. EXPLANATION OF CERTAIN DIFFERENCES BETWEEN THE GOVERNMENTAL FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE AND THE GOVERNMENT- WIDE STATEMENT OF ACTIVITIES The governmental fund statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes in fund balances – total governmental funds and change in net position of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains, “Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense.” The details of this difference are as follows: Capital outlay $ 4,272,737 Depreciation expense (1,504,644) Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities $ 2,768,093 Another element of that reconciliation explains that, “the issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt uses financial resources of the governmental funds. Neither of these transactions has any effect on the net position. Also, governmental funds report the effect of premiums, discounts and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities.” The details of these differences are as follows: Principal repayments $ (3,265,000) Issuance of general obligation bonds 1,920,000 Add premium 42,010 OPEB expense 23,686 Amortization of deferred losses on refunding 37,057 Amortization of bond premium and discount 2,689 Prior year interest expense (315,307) Accrue interest expense for current year 300,398 Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities (1,254,467) 52 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 3. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. BUDGETS AND BUDGETARY ACCOUNTING Annual budgets are adopted on a basis consistent with U.S. generally accepted accounting principles for all governmental funds except the Section 8 and Hennepin County CDBG special revenue funds, the debt service funds and the capital projects funds, which are not budgeted. A capital improvement plan is reviewed annually by the City Council for the capital projects funds and utility funds. However, appropriations for major projects are not adopted until the actual bid award of the improvement. The appropriations are not reflected in the financial statements. All annual appropriations lapse at fiscal year end. The City follows these procedures in establishing the budgetary data reflected in the financial statements and set forth in Section 7.04 of the City Charter. 1. The City Manager shall, at the first regular council meeting in September, submit to the Council a proposed budget and an explanatory budget message in a form and manner as prescribed by the City Charter. 2. The Council shall determine the plan and time of the public hearings on the budget to obtain taxpayer comments. 3. The Council shall adopt the tax levy by resolution no later than a December date, which is annually established by law for the county auditor to levy taxes. The budget shall set forth the total for each budgeted fund with such segregation as to objects and purposes of expenditures as the Council deems necessary for purposes of budget control. 4. The City Manager is authorized to transfer budgeted amounts between departments within any fund; however, any revisions that alter the total expenditures of any fund must be approved by the City Council and are limited to the amount revenues exceed the budgets or authorize the transfer of sums from unexpended balances to other purposes. Budgeted expenditure appropriations lapse at year-end. The level of legal control is at the fund level. 5. The Council made no supplemental budgetary appropriation throughout the year. B. EXCESS OF EXPENDITURES OVER APPROPRIATIONS For the year ended December 31, 2013, actual expenditures exceeded the budgeted amounts in the following funds: General Fund $ 229,124 Economic Development 11,392 State Chemical Assessment Team 22,770 Parking 50,138 Depot Coffee House 31,450 Tax Increment District Entertainment District 11,475 Tax Increment District Sonoma 10,064 Tax Increment District Super Valu 624,024 5th Avenue Flats 1,770 Tax Increment Marketplace & Main 135 These over expenditures were funded by greater than anticipated revenues of the General, Economic Development, State Chemical Assessment Team, and Tax Increment District Sonoma funds, from fund balance in the State Chemical Assessment Team and Depot Coffee House funds, and by future revenues in the Depot Coffee House, Tax Increment District Entertainment District, 5th Avenue Flats and Tax Increment District Marketplace & Main funds. 53 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Budgets are adopted for some special revenue fund types but not all. Excluded from the budget adoption process are funds that are completely reimbursable from the federal and state governments. The Community Development Block Grant Funds is a non-budgeted fund. C. FUND BALANCE DEFICITS At December 31, 2013, the following funds had deficit fund balances or net position. These deficits will be funded through future tax levies, contributions, grants, charges for services or developer payments: Art Center $ 1,089,972 Depot Coffee House 10,094 Tax Increment District Entertainment District 113,792 Tax Increment District Sonoma 207,885 5th Avenue Flats 378,185 Tax Increment District Marketplace & Main 211,016 D. NET POSITION RESTRICTED BY ENABLING LEGISLATION The government-wide statement of net position reports $2,002,941 in restricted net position for economic development, of which $1,550,357 is restricted by enabling legislation. 4. DEPOSITS AND INVESTMENTS As of December 31, 2013 the City had the following deposits and investments: Investment Type Fair Value Government securities $ 1,210,340 Municipal obligations 6,859,697 Negotiable certificates of deposit 6,845,076 Money market 6,221,120 Deposits 424,287 Total fair value cash and investments $ 21,560,520 Interest rate risk – Interest rate risk is the risk that the fair value of investments will be adversely affected by a change in interest rates. In accordance with City of Hopkins Legislative Policy 6-B, Standards of Investments, the city manages its exposure to declines in fair values by structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity. At December 31, 2013 the City had the following investment maturities: Investment Maturities (in Years) Fair Less ValuethanOne1-5 6-10 16-20 Investment Type: Government securities FNMA $ 712,879 $ - $ 489,149 $ - $ 223,730 FHLB 497,461 - 497,461 - - Municipal obligations 6,859,697 2,288,065 4,091,417 480,215 - Negotiable certificates of deposit 6,845,076 4,655,000 1,960,069 230,007 - Money market 6,221,120 6,221,120 - - - $ 21,136,233 $ 13,164,185 $ 7,038,096 $ 710,222 $ 223,730 54 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Credit risk – Credit risk is the risk that an issuer or other counter party to an investment will not fulfill its obligations. Credit risk is measured using credit quality ratings of investments in debt securities as described by nationally recognized rating agencies such as Standard & Poor’s and Moody’s. According to the City’s investment policy commercial paper shall be restricted to issues, which mature in 270 days or less with a rating of A-1 (Moody’s), P-1 (Standard & Poor’s) or F-1 (Fitch) among at least two of the three rating agencies. The City is authorized by Minnesota Statutes to invest in the following: (a) Direct obligations or obligations guaranteed by the United States or its agencies (b) Shares of investment companies registered under the Federal Investment Company Act of 1940 and whose only investments are in securities described in (a) above (c) General obligations in the State of Minnesota or any of its municipalities (d) Bankers’ acceptances of United States banks eligible for purchase by the Federal Reserve System (e) Commercial paper issued by United States corporations or their Canadian subsidiaries, of the highest quality, and maturity in 270 days or less; and (f) Guaranteed investment contracts issued or guaranteed by United States commercial banks or domestic branches of foreign banks or United States insurance companies or their subsidiaries (g) Repurchase or reverse repurchase agreements with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000, a primary reporting dealer in U.S. Government securities to the Federal Reserve Bank of New York, or certain Minnesota securities broker-dealers. The following table lists the credit quality ratings per Moody’s and/or Standard and Poor’s and/or Fitch of the City’s investments at December 31, 2013. QualityRatings Fair Not ValueAAA AA ARated Investment Type: Government securities FNMA $ 712,879 $ - $ 712,879 $ - $ - FHLB 497,461 497,461 - Municipal obligations 6,859,697 1,047,153 5,308,079 504,465 - Negotiable certificates of deposit 6,845,076 - - - 6,845,076 Money market 6,221,120 - - - 6,221,120 $ 21,136,233 $ 1,047,153 $ 6,518,419 $ 504,465 $ 13,066,196 Custodial credit risk Deposits – For deposits, this is the risk that in the event of a bank failure, the City’s deposits may not be returned to it. Minnesota Statutes require that all City deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or bonds. Authorized collateral includes the legal investments described above, as well as certain first mortgage notes, and certain other state or local government obligations. Minnesota Statutes require that securities pledged as collateral be held in safekeeping by the City treasurer or in a financial institution other than that furnishing the collateral. At December 31, 2013 the City had no deposits that were uninsured or uncollateralized. The deposits were insured or collateralized by securities held by the City’s agent in the City’s name. Investments – For an investment, this is the risk that, in the event of the failure of the counterparty, the City will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. All investments held by the City are insured or registered or are held by the City or its agent in the City’s name. The City has no investments that are uninsured or unregistered nor are any investments held by a counterparty or a counterparty's trust department or agent that is not in the city's name. 55 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Concentration of credit risk – This is the risk associated with investing a significant portion of the City’s investments (considered 5% or more) in the securities of a single issuer, excluding U.S. explicitly guaranteed investments (Treasuries), investment pools, and mutual funds. As of December 31, 2013, the city had no investments exceeding 5% or more for a single issuer. 5. CAPITAL ASSETS Capital asset activities for the year ended December 31, 2013 were as follows: Beginning Ending Balance Increases Decreases Transfers Balance Governmental activities: Capital assets, not being depreciated Land $ 5,805,711 $ - $ - $ - $ 5,805,711 Construction in progress 1,814,572 4,079,660 - (1,706,298) 4,187,934 Total not being depreciated 7,620,283 4,079,660 - (1,706,298) 9,993,645 Capital assets, being depreciated Buildings 20,042,280 - - - 20,042,280 Other Improvements 36,327,425 165,944 - 1,706,298 38,199,667 Vehicles 3,474,781 756,998 (150,400) - 4,081,379 Machinery & equipment 5,401,163 313,785 (52,057) - 5,662,891 Total being depreciated 65,245,649 1,236,727 (202,457) 1,706,298 67,986,217 Less accumulated depreciation Buildings (5,204,581) (495,220) - - (5,699,801) Other Improvements (14,342,249) (927,921) - - (15,270,170) Vehicles (1,858,640) (268,185) 150,400 - (1,976,425) Machinery & equipment (3,935,668) (306,583) 50,223 - (4,192,028) Total accumulated depreciation (25,341,138) (1,997,909) 200,623 - (27,138,424) Total capital assets, being depreciated, net 39,904,511 (761,182) (1,834) 1,706,298 40,847,793 Governmental activities capital assets, net $ 47,524,794 $ 3,318,478 $ (1,834) $ - $ 50,841,438 Beginning Ending Balance Increases Decreases Transfers Balance Business-type Activities: Capital assets, not being depreciated Land $ 228,463 $ - $ - $ - $ 228,463 Construction in progress 578,206 1,756,267 - (482,667) 1,851,806 Total not being depreciated 806,669 1,756,267 - (482,667) 2,080,269 Capital assets, being depreciated Buildings 7,813,889 93,872 - - 7,907,761 Infrastructure 19,150,463 56,094 - - 19,206,557 Other Improvements 9,347,347 20,081 - 482,667 9,850,095 Vehicles 754,107 - - - 754,107 Machinery & equipment 841,216 45,935 (85,000) - 802,151 Total being depreciated 37,907,022 215,982 (85,000) 482,667 38,520,671 Less accumulated depreciation Buildings (4,170,245) (222,986) - - (4,393,231) Infrastructure (11,055,028) (402,769) - - (11,457,797) Other Improvements (1,412,532) (208,251) - - (1,620,783) Vehicles (370,484) (61,296) - - (431,780) Machinery & equipment (644,678) (36,537) 85,000 - (596,215) Total accumulated depreciation (17,652,967) (931,839) 85,000 - (18,499,806) Total capital assets, being depreciated, net 20,254,055 (715,857) - 482,667 20,020,865 Business-type activities capital assets, net $ 21,060,724 $ 1,040,410 $ - $ - $ 22,101,134 56 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Depreciation expense was charged to City functions as follows: Governmental activities: General government $ 61,297 Public safety 221,060 Highways and streets 1,073,437 Urban redevelopment and housing 613 Culture and recreation 148,238 Capital assets held by the government's internal service funds are charged to the various functions based on their usage of the assets 493,264 Total depreciation expense - governmental activities $ 1,997,909 Business-type activities: Water $ 249,756 Sewer 171,604 Storm Sewer 227,366 Refuse 53,673 Pavilion/Ice arena 71,619 Housing and Redevelopment Authority 157,821 Total depreciation expense - business-type activities $ 931,839 Construction commitments The City has active construction projects as of December 31, 2013. The projects include street improvements. The City’s commitment with contractors related to these projects is $114,114. On October 15, 2013 the City Council entered into a 14 year maintenance agreement with SEH Design/Build, Inc. for inspection, maintenance, cleaning and painting of the city's two water towers. The contract commitment totals $1,529,400 and will be paid in annual installments beginning in 2014. 6. INTERFUND RECEIVABLES AND PAYABLES The following funds had amounts receivable from other funds, and the respective funds had equal amounts payable to other funds at December 31, 2013: Due from Other Funds Economic General Development Total Due to other funds: Non-major governmental $ 394,894 $ 642,830 $ 1,037,724 Arts Center 737,648 300,000 1,037,648 Non-major proprietary 23,247 - 23,247 Total due to other funds $ 1,155,789 $ 942,830 $ 2,098,619 57 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Advances from other funds Internal Service Total Advanced to other funds: Nonmajor proprietary $ 3,068 $ 3,068 Total advances to other funds $ 3,068 $ 3,068 The interfund receivables and payables are to eliminate negative cash between funds and to allow for development loans or to facilitate a project or operations of another fund. 7. INTERFUND TRANSFERS The following is a summary of transfers between funds as of December 31, 2013: Transfers in Permanent Art Improvement Non-major Internal Center Revolving Governmental Service Total Transfers out: General $ - $ - $ 10,000 $ 23,580 $ 33,580 Economic Development 61,000 - - - 61,000 Permanent Improvement Revolving - - 204,005 - 204,005 Storm Sewer - - 120,000 - 120,000 Non-major governmental - 1,924,779 448,357 451,769 2,824,905 Non-major business-type 86,920 - 25,000 - 111,920 Internal service - 68,495 - 68,495 Total transfers in $ 147,920 $ 1,924,779 $ 875,857 $ 475,349 $ 3,423,905 Interfund transfers allow the City to allocate financial resources to debt service funds that are paying the general obligation debt. Non-routine transfers include the following: 6) Annual transfers from storm sewer and refuse funds for lease payments on new public works facility. 7) An annual transfer, from the Economic Development and non-major governmental Communication funds to the Art Center Fund totaling $147,920 to pay the original debt for building the facility. 8) Annual transfers from Tax Increment Special Revenue funds to Debt Service funds for debt payments. 9) Transfers from non-major governmental funds to Permanent Improvement Revolving and Internal Service Fund for bond proceeds. (remainder of page left blank intentionally) 58 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 8. LEASES The city has entered into a lease agreement as a lessee for financing the acquisition of an aerial lift fire truck with a down payment of $445,427. The lease agreement qualifies as a capital lease for accounting purposes and, therefore, has been recorded at the present value of their future minimum lease payments as of the inception date. The asset acquired through the capital lease is as follows: Governmental Activities Asset: Machinery and equipment $ 870,427 Less: Accumulated depreciation (224,797) Total $ 645,630 The future minimum lease obligations and the net present value of these minimum lease payments as of December 31, 2013 are as follows: Governmental Year Ending December 31, Activities 2014 $ 54,217 2015 54,217 2016 54,217 2017 54,217 2018 54,217 Total minimum lease payments 271,085 Less: amount representing interest (33,095) Present value of minimum lease payments $ 237,990 9. LONG-TERM DEBT The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds have been issued for governmental activities. General Obligation Bonds are backed by the full faith, credit and taxing power of the City, and are serviced by General and Tax Increment levies and also by fees assessed against benefited properties. These bonds generally are issued as 20-year serial bonds. Refunding On November 17, 2010 the City issued $1,585,000 General Obligation Refunding Bonds, Series 2010B for a crossover refunding of $1,490,000 General Obligation Tax Increment Bonds, Series 2002A. Future debt service payments will be reduced by $109,172 with a present value savings of $92,997. The refunded bonds were called and paid on February 1, 2013. General obligation bonds currently outstanding are as follows: Interest Rates Original Amount Current Amount Purpose Governmental activities 0.35 – 5.00%$12,620,000 $9,435,000 Governmental activities – refunding 0.50 – 5.15% 6,275,000 4,720,000 59 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Annual debt service requirements to maturity for general obligation bonds are as follows: Year Ending Governmental Activities December 31 Principal Interest 2014 $ 1,415,000 $ 471,592 2015 1,450,000 427,143 2016 1,525,000 378,359 2017 1,455,000 327,681 2018 1,495,000 275,501 2019-2023 6,815,000 604,724 $ 14,155,000 $ 2,485,000 The City also has special assessment bonds, which are backed by the full faith, credit and taxing power of the City, and repayment monies are generated by the collection of special assessments and general levies. On April 25, 2013 the City issued $1,920,000 series 2013A General Obligation Improvement Bonds for the 2013 street improvements. General obligation bonds currently outstanding are as follows: Purpose Interest Rates Original Amount Current Amount Street Improvements 0.50 – 4.25%$9,870,000 $ 8,675,000 Annual debt service requirements to maturity for special assessment bonds are as follows: Year Ending Governmental Activities December 31 Principal Interest 2014 $ 555,000 $ 212,132 2015 680,000 185,959 2016 700,000 168,453 2017 715,000 150,009 2018 740,000 130,502 2019-2023 2,650,000 459,655 2024-2028 2,490,000 150,121 2029 145,000 1,813 $ 8,675,000 $ 1,458,644 (remainder of page left blank intentionally) 60 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Revenue Bonds The City also issues bonds where the government pledges income derived from the acquired or constructed assets to pay debt service. On April 25, 2013 the City issued $1,730,000 General Obligation Bonds, Series 2013A for the water ($860,000), sewer ($490,000) and storm sewer ($380,000) portion of the 2013 street improvement project. Revenue bonds outstanding at year-end are as follows: Purpose Interest Rates Original Amount Current Amount Water refunding 2.0 – 4.0% $ 850,000 $ 355,000 Water construction & replacement 2.0 – 4.0% 820,000 685,000 Water construction & replacement 2.0 – 2.2% 760,000 720,000 Water construction & replacement 2.0 - 2.5% 860,000 860,000 Sanitary sewer construction & replacement 2.0 – 4.0% 1,020,000 850,000 Sanitary sewer construction & replacement 2.0 – 2.2% 170,000 160,000 Sanitary sewer construction & replacement 2.0 - 2.5% 490,000 490,000 Storm sewer – refunding 2.0 – 4.0% 605,000 250,000 Storm sewer – refunding 0.5 – 2.9% 875,000 745,000 Storm sewer construction & replacement 2.0 – 2.2% 320,000 305,000 Storm sewer construction & replacement 2.0 - 2.5% 380,000 380,000 Pavilion equipment certificates 2.0 – 2.0% 175,000 175,000 Revenue bond debt service requirements to maturity are as follows: Year Ending December 31 Principal Interest 2014 $ 555,000 $ 154,992 2015 675,000 130,556 2016 380,000 117,794 2017 385,000 108,969 2018 395,000 99,494 2019-2023 2,095,000 335,585 2024-2028 1,355,000 88,089 2029 135,000 1,687 $ 5,975,000 $ 1,037,166 The City is subject to a statutory limit of bonded indebtedness equaling 3.0 percent of taxable market value. At December 31, 2013, the debt limit for the City is $46,161,361. Of the total debt, $9,435,000 of general obligation and revenue bonds is applicable to the limit. The legal debt margin is $36,726,361. Advance Refunding On August 14, 2007 the City issued $9,920,000 in General Obligation Capital Improvement Bonds, Series 2007A for the purpose of refunding the $10,760,000 HRA Lease Revenue Bonds, Series 2002A. Future debt service payments will be reduced by $120,340 with a present value savings of $89,973. As of December 31, 2013, $6,930,000 remained outstanding. On September 13, 2012 the City issued $1,905,000 in General Obligation Capital Improvement Bonds, Series 2012A for the purpose of refunding the $3,050,000 HRA Lease Revenue Bonds, Series 2003. Future debt service payments will be reduced by $214,280 with a present value savings of $206,557. As of December 31, 2013, $1,765,000 remained outstanding. 61 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Changes in Long-Term Liabilities Long-term liability activity for the year ended December 31, 2013, was as follows: Beginning Ending Due Within Balance Additions Deductions Balance One Year Governmental Activities: Bonds payable: G.O. tax increment bonds $ 6,765,000 $ -$ 2,045,000 $ 4,720,000 $ 600,000 General obligation bonds 10,180,000 - 745,000 9,435,000 815,000 Total general obligation bonds 16,945,000 - 2,790,000 14,155,000 1,415,000 Special assessment bonds 7,230,000 1,920,000 475,000 8,675,000 555,000 Less deferred amounts For issuance discounts (116,687) - 10,148 (106,539) - For issuance premiums 68,285 42,010(7,460)102,835 - Total bonds payable 24,126,598 1,962,010 3,267,688 22,826,296 1,970,000 Compensated absences 799,054 768,650 745,081 822,623 745,081 Net OPEB liability 167,802 151,639 127,953 191,488 - Capital lease payable 279,083 - 41,093 237,990 21,301 Governmental activity long-term liabilities $ 25,372,537 $ 2,882,299 $ 4,181,815 $ 24,078,397 $ 2,736,382 Business-type activities: Bonds payable: Revenue bonds $ 4,780,000 $ 1,730,000 $ 535,000 $ 5,975,000 $ 555,000 Less deferred amounts For issuance discounts (7,227) - 717 (6,510) - For issuance premiums 60,187 37,852 (11,823) 86,216 - Compensated absences 165,186 97,978 95,441 167,723 95,443 Net OPEB liability 31,276 31,345 25,083 37,538 - Business-type activity long-term liabilities $ 5,029,422 $ 1,897,175 $ 644,418 $ 6,259,967 $ 650,443 For the governmental activities, compensated absences and the net OPEB liability are generally liquidated by the general and special revenue funds. (remainder of page left blank intentionally) 62 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 10. FUND BALANCES At December 31, 2013, the City had various fund balances through legal restriction and City Council authorization. Major fund balance appropriations at December 31, 2013 are shown on the various balance sheets as segregations of the fund balance. The fund balances are as follows: Total Nonspendable Restricted Committed Assigned Unassigned General Fund $ 4,823,141 $ - $ - $ - $ - $ 4,823,141 Inventories 104,718 104,718 - - - - Prepaid items 126,890 126,890 - - - - Community development 426,768 - - - 426,768 - Total General Fund 5,481,517 231,608 - - 426,768 4,823,141 Economic Development Long term receivable 942,830 -- 942,830 - - Property held for resale 697,098 - - 697,098 - - Prepaid items 1,050 1,050 - - - - Economic Development 2,198,283 - - 2,198,283 - - Total Economic Development Fund 3,839,261 1,050 - 3,838,211 - - Arts Center Prepaid items 135 135 - - - - Deficit Fund Balance (1,090,107) - - - - (1,090,107) Total Arts Center Fund (1,089,972) 135 - - - (1,090,107) Housing Improvement Bonds of 1999A Refunding Bonds of 2009B Debt service 318,668 - 318,668 - - - Housing Improvement Bonds of 1999B Refunding Bonds of 2009B Debt service 593,114 - 593,114 - - - Municipal State Aid Construction Capital asset replacement 467,787 - - - 467,787 - Permanent Improvement Revolving Capital asset replacement 2,341,089 - - - 2,341,089 - Nonmajor Governmental Funds Prepaid items 310 310 - - - - Rehab loans 25,816 - 25,816 - - - Long term receivable 3,000 - 3,000 - - - Property held for resale 321,719 - 321,719 - - - Debt service 2,558,965 - 2,558,965 - - - Public safety 2,929 - 2,929 - - - Tax increment 1,238,638 - 1,238,638 - - - Park improvements 136,566 - 136,566 - - - Economic development 123,114 - - 123,114 - - Parking improvements 129,219 - - 129,219 - - Communications 418,482 - - 418,482 - - Capital asset replacement 504,210 - - - 504,210 - Deficit fund balance (921,107) - - - - (921,107) Total Nonmajor Funds 4,541,861 310 4,287,633 670,815 504,210 (921,107) Total Fund Balances $ 16,493,325 $ 233,103 $ 6,839,343 $ 2,869,098 $ 3,739,854 $ 2,811,927 63 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 11. PENSION PLAN OBLIGATIONS 1. Defined Benefit Pension Plans - Statewide A. Plan Description All full-time and certain part-time employees of the City of Hopkins are covered by defined benefit plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA administers the General Employees Retirement Fund (GERF) and the Public Employees Police and Fire Fund (PEPFF), which are cost sharing, multiple-employer retirement plans. These plans are established and administered in accordance with Minnesota Statutes, Chapters 353 and 356. GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new members must participate in the Coordinated Plan. All police officers, fire fighters and peace officers that qualify for membership by statute are covered by PEPFF. PERA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by State Statute, and vest after three years of credited service. The defined retirement benefits are based on a member's highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. Two methods are used to compute benefits for GERF's Coordinated and Basic Plan members. The retiring member receives the higher of a step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2 percent of average salary for each of the first 10 years of service and 2.7 percent for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2 percent of average salary for each of the first 10 years and 1.7 percent for each remaining year. Under Method 2, the annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each year of service. For PEPFF members, the annuity accrual rate is 3.0 percent for each year of service. For all PEPFF members and GERF members hired prior to July1, 1989 whose annuity is calculated using Method 1, a full annuity is available when age plus years of service equal 90. Normal retirement age is 55 for PEPFF members and 65 for Basic and Coordinated members hired prior to July 1, 1989. Normal retirement age is the age for unreduced Social Security benefits capped at 66 for Coordinated members hired on or after July 1, 1989. A reduced retirement annuity is also available to eligible members seeking early retirement. There are different types of annuities available to members upon retirement. A single-life annuity is a lifetime annuity that ceases upon the death of the retiree--no survivor annuity is payable. There are also various types of joint and survivor annuity options available which will be payable over joint lives. Members may also leave their contributions in the fund upon termination of public service in order to qualify for a deferred annuity at retirement age. Refunds of contributions are available at any time to members who leave public service, but before retirement benefits begin. The benefit provisions stated in the previous paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF and PEPFF. That report may be obtained on the web at mnpera.org, by writing to PERA, 60 Empire Drive #200, St. Paul, Minnesota, 55103-2088 or by calling (651) 296-7460 or 1-800-652-9026. 64 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 B. Funding Policy Minnesota Statutes Chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the state legislature. The City makes annual contributions to the pension plans equal to the amount required by state statutes. GERF Basic Plan members and Coordinated Plan members were required to contribute 9.1% and 6.25%, respectively, of their annual covered salary in 2013. PEPFF members were required to contribute 9.6% of their annual covered salary in 2013. The City of Hopkins is required to contribute the following percentages of annual covered payroll: 11.78% for Basic Plan GERF members, 7.25% for Coordinated Plan GERF members and 14.4% for PEPFF members. The City’s contributions to the General Employees Retirement Fund for the years ending December 31, 2013, 2012 and 2011 were $334,204, $341,474, and $343,546, respectively. The City’s contributions to the Public Employees Police & Fire Fund for the years ending December 31, 2013, 2012 and 2011 were $339,831, $317,772, and $311,058, respectively. The City’s contributions were equal to the contractually required contributions for each year as set by state statute. The City's pension obligation is funded by the General, Special Revenue and Enterprise Funds. 2. Hopkins Fire Relief Association (HFRA) A. Plan Description The City contributes to the Hopkins Fire Relief Association (Association); a single employer defined benefit plan. The Association administers the plan and issues separate financial statements that can be obtained by contacting the Association. Volunteer firefighters of the City are members of the Association. The plan provides for permanent and short term disability benefits, death benefits and pensions with a set value for the annual withdrawal amount. Full vesting in the plan requires a member to have served for at least 5 years, to have reached the age of 50 years and to have been a member of the Association for at least 20 years. These benefit provisions and all other requirements are consistent with enabling statutes. B. Funding Policy and Annual Pension Information The governing board of the Association requests changes in benefit levels and contribution requirements that must be approved by the City Council. The funding policy provides that contributions from the City and from the State of Minnesota are in amounts sufficient to accumulate assets to pay benefits when due. The City passes through state aids allocated to the plan, in accordance with state statutes. The annual pension information is as follows: 2013 Contributions: City $ 32,166 State $ 98,843 Actuarial valuation date: 12/31/12 Actuarial cost method: Entry age normal Amortization method Level dollar – closed Remaining amortization period Normal cost 20 years Prior year service cost 5 years Asset valuation method Market Actuarial assumptions Investment rate of return 11% Projected salary increases N/A Inflation rate N/A Cost of living adjustments None 65 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 Annual Pension Benefit Cost for Past Three Years (the most current available) Annual Pension % of Annual Pension Net Pension Obligation Year Ended Cost (APC) Cost Contributed At Year Ended 12/31/2012 $ 98,335 100% $ 0 12/31/2011 $ 100,105 100% $ 0 12/31/2010 $ 263,957 100% $ 0 The estimated accrued liability of $1,988,396 at December 31, 2012 was calculated using the State of Minnesota Schedule I form for lump sum pension plans. This results in excess (deficit) net position available for benefits of $224,728 as of December 31, 2012. The Hopkins Fire Department is a volunteer organization and therefore does not have payroll to disclose. 12. OTHER POST EMPLOYMENT BENEFIT PLAN At December 31, 2008, the City adopted Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions. The City engaged an actuary to determine the City’s liability for postemployment healthcare benefits other than pensions as of January 1, 2013, for this single employer defined benefit OPEB plan. 1. Plan Description The City, a single-employer postemployment benefit plan, provides benefits for retirees as required by Minnesota Statute §471.61 subdivision 2b. Active employees, who were hired prior to July 1, 1993 and have been with the City for at least ten years and are either (1) age 60 years or older or (2) eligible for full PERA retirement benefits. Employees retiring by June 30, 2007 will receive full single health and life insurance coverage until age 65; employees retiring between July 1, 2007 and December 31, 2009 will receive $500 per month towards the cost of single health and life insurance until age 65; and employees retiring after December 31, 2009 will receive $15 per month times years of service (maximum of $500 per month) towards the cost of single health and life insurance until age 65. Currently17 employees meet those eligibility requirements. As of December 31, 2013 there were approximately 85 active participants and 16 retired participants receiving benefits from the City’s health plans. 2. Funding Policy The City funds its OPEB obligation on a pay as you go basis. For fiscal year 2013, the City contributed $171,142 to the plan. The City's OPEB pension obligation is funded by the General and Enterprise Funds. (remainder of page left blank intentionally) 66 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 3. Annual OPEB Cost and Net OPEB Obligation The City’s annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any un-funded actuarial liabilities over a period not to exceed thirty years. The following table shows the components of the City’s annual OPEB cost for the year, the amount actually paid from the plan, and changes in the City’s net OPEB obligation. Annual Required Contribution $ 204,517 Interest on Net OPEB Obligation 8,959 Adjustment to Annual Required Contribution (12,386) Annual OPEB Cost (Expense) 201,090 Contributions Made (171,142) Increase in Net OPEB Obligation 29,948 Net OPEB Obligation - Beginning of Year 199,078 Net OPEB Obligation - End of Year $ 229,026 The City’s annual OPEB cost, the percentage of the annual OPEB cost contributed to the plan, and the net OPEB obligation for 2013: Percentage Fiscal Annual of Annual Net Year OPEB OPEB Cost OPEB Ended Cost Contributed Obligation 12/31/2011 $ 199,657 76.8 %$ 152,972 12/31/2012 199,142 76.8 % 199,078 12/31/2013 201,090 87.8 % 229,026 4. Funded Status and Funding Progress As of January 1, 2013, the most recent actuarial valuation date, the City’s unfunded actuarial accrued liability (UAAL) was $2,029,907. The annual payroll for active employees covered by the plan in the actuarial valuation was $6,583,173 for a ratio of UAAL to covered payroll of 30.83%. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and healthcare cost trends. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 5. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 67 City of Hopkins, Minnesota NOTES TO FINANCIAL STATEMENTS, (CONT.) December 31, 2013 In the January 1, 2013 actuarial valuation, the projected unit credit actuarial cost method was used. The actuarial assumptions included a 4.5% investment rate of return (net of administrative expenses), which is a blended rate of the expected long-term investment returns on plan assets and on the employer’s own investments calculated based on the funded level of the plan at the valuation date. The initial healthcare trend rate was 7.5%, reduced by decrements to an ultimate rate of 5% after six years. Both rates include a 2.5% inflation assumption. The UAAL is being amortized as a level percentage of projected payrolls on an closed basis over a period not to exceed 30 years. 13. REHABILITATION LOANS RECEIVABLE The City makes rehabilitation loans to residential and commercial entities within the City. Residential loans are made for 20 year periods at 3% interest. A mortgage against the property improved is required and City staff is responsible to follow-up any delinquent accounts. Loan repayments are made to Matrix Financial Services, a loan service bureau, which charges a fee of $5.95 per month per loan. Principal and interest are forwarded to the City monthly with loan collection and loan status reports. Rehabilitation loan activity is a function of the Economic Development Fund, and the Hennepin County CDBG Funds. Loans become due in full upon sale of property. Rehabilitation loans receivable amounted to $ 25,816 at December 31, 2013 and are recorded in the Hennepin County CDBG non-major special revenue funds. 14. CLAIMS AND LITIGATION The City had the usual and customary types of miscellaneous claims pending at year-end, which are of a minor nature and usually all covered by insurance carried for that purpose. The City carries a $1,000,000 Public Official Liability Insurance policy with public entity and employee endorsement. 15. RISK MANAGEMENT The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City participates in a public entity risk pool to mitigate its exposure to these risks. Workers compensation and property and liability coverage are provided through a pooled self-insurance plan with other cities. Settled claims have not exceeded insurance coverage in any of the past three fiscal years and no significant reductions in coverage from the prior year. The City pays an annual premium based on prior claims history for its workers compensation coverage. The public entity risk pool is responsible for the payment of all associated claims. The City has a $20,000 deductible per occurrence with a maximum per year out of pocket of $40,000, for its property and liability coverage. The public entity risk pool is responsible for all losses in excess of $20,000 per occurrence and all losses occurring after the $40,000 maximum City out of pocket costs. 16. SUBSEQUENT EVENT On May 6, 2014, the government authorized the issuance of street reconstruction bonds in the amount of $1,940,000 to fund the 2014 street improvement project. The anticipated interest rate is .75-3.25% with an expected maturity date of February 1, 2030. The scheduled closing date is July 1, 2014. 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134