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1 - Communications Letter City of Otsego Wright County, Minnesota Communications Letter December 31, 2020 City of Otsego Table of Contents Report on Matters Identified as a Result of the Audit of the Financial Statements 1 Significant Deficiency 3 Required Communication 4 Financial Analysis 8 Emerging Issue 19 1 Report on Matters Identified as a Result of the Audit of the Financial Statements Honorable Mayor, Members of the City Council and Management City of Otsego Otsego, Minnesota In planning and performing our audit of the financial statements of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information of the City of Otsego, Minnesota, as of and for the year ended December 31, 2020, 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, we considered the City's internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist that have not been identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error, or fraud may occur and not be detected by such controls. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility exists when the likelihood of an event occurring is either reasonably possible or probable as defined as follows: • Reasonably possible. The chance of the future event or events occurring is more than remote but less than likely. • Probable. The future event or events are likely to occur. We did not identify any deficiencies in internal control that we consider to be material weaknesses. 2 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The significant deficiency identified is stated within this letter. The accompanying memorandum also includes financial analysis provided as a basis for discussion. The matters discussed herein were considered by us during our audit and they do not modify the opinion expressed in our Independent Auditor's Report dated May 24, 2021, on such statements. This communication is intended solely for the information and use of management, Members of the City Council, others within the City and state oversight agencies and is not intended to be, and should not be, used by anyone other than these specified parties. St. Cloud, Minnesota May 24, 2021 3 City of Otsego Significant Deficiency Lack of Segregation of Accounting Duties The City had a lack of segregation of accounting duties due to a limited number of office employees. Adequate segregation of accounting duties is in place when the following four areas of a transaction have been separated: authorization, custody, recording, and reconciliation. Examples of functions within the City that demonstrate this lack of segregation of accounting duties include, but are not limited to, the following: • Cash Receipts – The Utility Billing Clerk and Accountant have access to initiate and record receipts. The Utility Billing Clerk is also responsible for depositing cash receipts. The Accountant is also involved in the reconciliation process and has full access to the general ledger. • Utility Billing Process – The Utility Billing Clerk is responsible for handling customer payments, depositing payments received. • Disbursements – Due to small staff the City allows access to other employees to perform disbursement related activities in order to fill in for normal roles and responsibilities in the absences of other staff. In the absence of the Accountant, the Utility Billing Clerk has access to record and cut checks and has access to blank checks. • Financial Reporting and Journal Entry Process – The Finance Director and Accountant have full access to the general ledger and can make adjustments without review during the monthly and year-end financial closing process. Management and the City Council must remain aware of this situation and management should continually monitor internal control, including changes that occur. 4 City of Otsego Required Communication We have audited the financial statements of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information of the City as of and for the year ended December 31, 2020. Professional standards require that we advise you of the following matters related to our audit. Our Responsibility in Relation to the Financial Statement Audit As communicated in our engagement letter, our responsibility, as described by professional standards, is to form and express opinions about whether the financial statements prepared by management with your oversight are presented fairly, in all material respects, in accordance with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of its respective responsibilities. Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the City solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. We are also responsible for communicating significant matters related to the audit that are, in our professional judgement, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. Generally accepted accounting principles provide for certain Required Supplementary Information (RSI) to supplement the basic financial statements. Our responsibility with respect to the RSI, which supplements the basic audit financial statements, is to apply certain limited procedures in accordance with generally accepted auditing standards. However, the RSI was not audited and, because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance, we do not express an opinion or provide any assurance on the RSI. Our responsibility for the supplementary information accompanying the financial statements, as described by professional standards, is to evaluate the presentation of the supplementary information in relation to the financial statements as a whole and to report on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements taken as a whole. Our responsibility with respect to the other information in documents containing the audited financial statements and auditor's report does not extend beyond the financial information identified in the report. We have no responsibility for determining whether this other information is properly stated. This other information was not audited and we do not express an opinion or provide any assurance on it. 5 City of Otsego Required Communication Our Responsibility in Relation to Government Auditing Standards As communicated in our engagement letter, part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, the objective of our tests was not to provide an opinion on compliance with such provisions. Our Responsibility in Relation to Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) As communicated in our engagement letter, in accordance with the Uniform Guidance, we examined, on a test basis, evidence about the City’s compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement applicable to each of its major federal programs for the purpose of expressing an opinion on the City’s compliance with those requirements. While our audit provided a reasonable basis for our opinion, it did not provide a legal determination on the City's compliance with those requirements. In planning and performing our audit of compliance, we considered the City's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Planned Scope and Timing of the Audit We conducted our audit consistent with the planned scope and timing we previously communicated to you. Compliance with All Ethics Requirements Regarding Independence The engagement team, others in our firm, as appropriate, our firm, and our network firms have complied with all relevant ethical requirements regarding independence. Qualitative Aspects of Significant Accounting Practices Significant Accounting Policies Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the City is included in the notes to financial statements. There have been no initial selection of accounting policies and no changes to significant accounting policies or their application during 2020. No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. 6 City of Otsego Required Communication Qualitative Aspects of Significant Accounting Practices (Continued) Significant Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's current judgements. Those judgements are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgements. The most sensitive estimates affecting the financial statements are: Depreciation – The City is currently depreciating its capital assets over their estimated useful lives, as determined by management, using the straight-line method. Expense Allocation – Certain expenses are allocated to programs based on an estimate of the benefit to that particular program. Examples are salaries, benefits, and supplies. Net Pension Liability, Deferred Outflows of Resources Related to Pensions and Deferred Inflows of Resources Related to Pensions – These balances are based on an allocation by the pension plans using estimates based on contributions. We evaluated the key factors and assumptions used to develop the accounting estimates and determined that they are reasonable in relation to the financial statements taken as a whole and in relation to the applicable opinion units. Financial Statement Disclosures Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The financial statement disclosures are neutral, consistent, and clear. Significant Difficulties Encountered during the Audit We encountered no significant difficulties in dealing with management relating to the performance of the audit. Uncorrected and Corrected Misstatements For the purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. Further, professional standards require us to also communicate the effects of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements taken as a whole and each applicable opinion unit. Management did not identify and we did not notify them of any uncorrected financial statement misstatements. In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures. None of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole. 7 City of Otsego Required Communication Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the City's financial statements or the auditor's report. No such disagreements arose during the course of our audit. Representations Requested from Management We have requested certain written representations from management, which are included in the management representation letter. Management's Consultations with Other Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management has informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters. Other Significant Matters, Findings, or Issues In the normal course of our professional association with the City, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the City, and operating plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the City's auditor. Other Information in Documents Containing Audited Financial Statements We applied certain limited procedures to the RSI that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding 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 did not audit the RSI and do not express an opinion or provide any assurance on the RSI. With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. We were not engaged to report on the other information accompanying the financial statements but are not RSI. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. 8 City of Otsego Financial Analysis The following pages provide graphic representation of select data pertaining to the financial position and operations of the City for the past five years. Our analysis of each graph is presented to provide a basis for discussion of past performance and how implementing certain changes may enhance future performance. We suggest you view each graph and document if our analysis is consistent with yours. A subsequent discussion of this information should be useful for planning purposes. General Fund The following graph summarizes the past five years of General Fund revenues, expenditures, and fund balance. For the year ended December 31, 2020, revenues for the City's General Fund totaled $9,055,697. This represents an increase of $2,362,838, or 35.3%, from 2019. General Fund expenditures totaled $6,657,325 in 2020, which is an increase of $970,435, or 17.1%, from 2019. Revenue and expenditure activity, combined with net transfers out of $730,449, resulted in an increase in fund balance of $1,667,923 in 2020. The ending General Fund balance of $5,987,733 is further broken down into spending categories; $334,946 is for nonspendable fund balances which is made up of $132,746 of prepaid items and $202,200 of assets held for resale. In addition, $214,743 is assigned for insurance deductibles and $28,042 is assigned for educational programs. This leaves $5,410,002 available for spending on any purpose, which is considered unassigned fund balance. The City's policy is to maintain a minimum fund balance in the General Fund of 45.0% of the subsequent years' expenditures. The fund balance at December 31, 2020, represents 90.6% of 2021 budgeted expenditures of $6,611,457. 2016 2017 2018 2019 2020 Total Revenues $5,791,496 $5,895,990 $6,305,790 $6,692,859 $9,055,697 Total Expenditures 4,712,360 4,732,327 5,294,967 5,686,890 6,657,325 Fund Balance 3,646,202 3,890,645 4,113,667 4,319,810 5,987,733 $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 General Fund 9 City of Otsego Financial Analysis General Fund Revenues Trends for each of the City's major revenue classifications over the past five years are graphically portrayed in the bar chart below. As stated earlier, General Fund revenues increased $2,362,838, or 35.3%, from 2019. Taxes increased $300,152 due to an increased tax levy. Intergovernmental increased $1,307,886 due to receiving the CARES grant in 2020. Licenses and Permits increased $832,910 due to an increase in the number of permits issued due to increased development. Charges for Services decreased $53,673 due to COVID-19 and reduced services offered in 2020. Other sources of revenue stayed consistent with the prior year. 2016 2017 2018 2019 2020 Investment Income $21,233 $31,343 $48,761 $155,709 $177,948 Other 126,624 259,416 58,077 108,364 61,688 Intergovernmental 69,567 74,080 78,437 88,328 1,396,214 Charges for Services 286,614 275,740 315,699 310,871 257,198 Licenses and Permits 1,661,565 1,363,384 1,672,906 1,699,879 2,532,789 Taxes 3,625,893 3,892,027 4,131,910 4,329,708 4,629,860 $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 General Fund Revenues 10 City of Otsego Financial Analysis General Fund Revenues (Continued) The allocation of revenues by source within each major classification is presented below for 2020 and 2019. The City continues to rely on tax revenue as the majority of its General Fund revenue, accounting for 51.1% of its total revenue in 2020. Intergovernmental increased to 15.4% due to CARES funding. Other sources of revenue were fairly consistent with the prior year. Taxes 51.1% Intergovernmental 15.4% Licenses and Permits 28.0% Charges for Services 2.8%Investment Income 2.0% Other 0.7% 2020 General Fund Revenues Taxes 64.7% Intergovernmental 1.3% Licenses and Permits 25.4% Charges for Services 4.6% Investment Income 2.3% Other 1.7% 2019 General Fund Revenues 11 City of Otsego Financial Analysis General Fund Revenues Budget and Actual The graph below outlines the budget and actual results for General Fund revenues. Taxes Intergovernmental Licenses and Permits Charges for Services Investment Income Other Budget $4,635,537 $75,000 $1,086,220 $202,615 $83,000 $28,600 Actual 4,629,860 1,396,214 2,532,789 257,198 $177,948 61,688 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000 2020 General Fund Revenues Budget and Actual Overall, actual revenue exceeded budgeted revenue by $2.944.725, or 48.2%. The largest variance was for licenses and permits which was $1,446,569 over budget. This was the result of budgeting conservatively for building and commercial construction permits for 2020. The second largest variance was in Intergovernmental which was $1,321,214 over budget due to not budgeting for the CARES grant. Investment income was over budget $94,948 due to budgeting conservatively. Charges for services was over budget $54,583 due to budgeting conservatively. The remaining revenues sources were consistent with budgeted amounts. 12 City of Otsego Financial Analysis General Fund Expenditures As discussed previously, total General Fund expenditures increased $970,435, or 17.1%, from 2019. General Government expenditures increased $192,070 due to capital improvements funded by the CARES grant received. Public safety expenditures increased $287,995 due to an increase in the County contract, and an increase in building inspection expenses related to the increased development activity referenced earlier. Economic Development expenditures increased $551,657 due to CARES grant expenditures related to pandemic relief grants. All other functions were consistent with the amounts expended in the prior year. 2016 2017 2018 2019 2020 General Government $1,240,005 $1,079,577 $1,188,219 $1,227,565 $1,419,635 Public Safety 1,829,288 1,895,467 2,168,187 2,379,440 2,667,435 Public Works 1,010,620 1,055,965 1,170,464 1,250,718 1,204,664 Parks and Recreation 534,122 587,739 654,786 715,026 699,793 Economic Development 98,325 113,579 113,311 114,141 665,798 $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 General Fund Expenditures 13 City of Otsego Financial Analysis General Fund Expenditures (Continued) The following charts illustrate the allocation of General Fund expenditures by program/function. The allocation of total expenditures by program has fluctuated slightly between the past two years as a result of the changes in expenditures as discussed on the previous page. The most significant fluctuation in 2020 was economic development increasing from 2.0% in 2019 to 10.0% in 2020 due to the pandemic relief grants provided in 2020. General Government 21.3% Public Safety 40.1%Public Works 18.1% Parks and Recreation 10.5%Economic Development 10.0% 2020 General Fund Expenditures General Government 21.6% Public Safety 41.8%Public Works 22.0% Parks and Recreation 12.6% Economic Development 2.0% 2019 General Fund Expenditures 14 City of Otsego Financial Analysis General Fund Expenditures Budget and Actual The graph below outlines the budget and actual results for General Fund expenditures. General Government Public Safety Public Works Parks and Recreation Economic Development Budget $1,462,349 $2,609,518 $1,350,556 $764,789 $125,460 Actual $1,419,635 2,667,435 1,204,664 699,793 665,798 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 2020 General Fund Expeditures Budget and Actual Overall, actual expenditures were over budgeted amounts by $344,653, or 5.5%. Economic Development had the largest variance, coming in $540,338 over budget. This variance is due to CARES grant expenditures related to pandemic relief grants not being included in the budget. Public Works had the second largest variance, coming in $145,892 under budget. This variance is primarily due to budgeting conservatively. Parks and Recreation was $64,996 under budget. This variance is primarily due to less programming being offered than anticipated due to COVID-19. Public Safety was $57,917 over budget. This variance is primarily due to building inspection expenditures being more than anticipated. The General Government function was consistent with the budgeted amounts. 15 City of Otsego Financial Analysis Tax Capacity, Levy, And Rates The chart below graphs the tax capacity, certified tax levy, and City tax rate for 2016 through 2020. Comparing 2016 through 2020, the City's tax capacity has increased $7,258,854, or 54.8%, to $20,497,278. The City's certified levy increased $2,174,106, or 43.3%, over the same time frame. As a result, the City's tax capacity rate has decreased from 37.9% in 2016 to 35.1% in 2020. When comparing 2019 to 2020 the chart indicates that even with a levy increase of $484,140 the tax rate decreased from 36.1% to 35.1% due to a $1,888,738 increase in the total tax capacity. $5,020,143 $5,629,771 $6,103,302 $6,710,109 $7,194,249 $13,238,424 $15,372,529 $16,696,008 $18,608,540 $20,497,278 37.92%37.85%36.56% 36.06%35.10% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00% $- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 2016 2017 2018 2019 2020 Tax Capacity, Levy, and Rates Tax Levy Total Tax Capacity Tax Capacity Rate 16 City of Otsego Financial Analysis Water Fund 2016 2017 2018 2019 2020 Operating Revenues $1,266,379 $1,459,868 $1,666,629 $1,626,076 $2,013,487 Operating Expenses 943,066 1,059,863 1,180,414 1,447,050 1,289,632 Operating Income with Depreciation 323,313 400,005 486,215 179,026 723,855 Operating Income without Depreciation 805,049 906,196 1,031,364 771,993 1,352,583 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 Water Fund The Water Fund experienced operating income of $723,855 in 2020. This is the fifth consecutive year with an operating income in the five years presented. We have also illustrated the operating income for the past five years with depreciation, a non-cash expense, factored out of operating expenses. In 2020, the City experienced operating income of $1,352,583 with depreciation expense factored out of operating expenses. Depreciation expense amortizes the original cost of fund capital assets over their estimated useful lives. In 2020, operating revenues increased $387,411, or 23.8%, while operating expenses decreased $157,418, or 10.9%. The increase in operating revenues was due to increased usage and more customers. Operating expenses decreased due to ordering fewer meters in 2020. After factoring in non-operating items and capital contributions, in the form of connection fees and developer and governmental fund contributions, and transfers, the net position in this fund increased by $3,477,594. Unrestricted net position was $8,320,291 at December 31, 2020. 17 City of Otsego Financial Analysis Sewer Fund 2016 2017 2018 2019 2020 Operating Revenues $1,590,795 $1,737,618 $1,921,402 $2,246,688 $2,469,354 Operating Expenses 1,888,280 1,913,520 2,049,079 2,097,663 2,414,741 Operating Income (Loss) with Depreciation (297,485)(175,902)(127,677)149,025 54,613 Operating Income without Depreciation 542,132 736,786 833,442 1,137,333 1,080,702 $(500,000) $(250,000) $- $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000 Sewer Fund In 2020, the Sewer Fund generated an operating income for the second time in the five years presented. In 2020, the Sewer Fund experienced an operating income of $54,613 with depreciation. Operating revenues increased $222,666 or 9.9% over the prior year, while operating expenses increased $317,078, or 15.1%. The increase in operating revenues is due to an increase in rates and usage. The increase in operating expenses was due to increased biosolids hauling. The operating income in 2020 was a result of increasing rates to assist in covering operating expenses and has experienced an increase in users. Without depreciation, operating income totaled $1,080,702. We recommend the City continue to monitor operations and fee structures of this fund to ensure positive operating results. After factoring in non-operating items, capital contributions, in the form of connection fees and developer and governmental fund contributions, and transfers, the net position in this fund increased $6,376,804. Unrestricted net position was $15,375,789 at December 31, 2020. 18 City of Otsego Financial Analysis Storm Water Fund 2016 2017 2018 2019 2020 Operating Revenues $46,811 $61,540 $70,010 $109,372 $120,579 Operating Expenses 42,342 62,172 71,040 123,163 138,985 Operating Income (Loss) with Depreciation 4,469 (632)(1,030)(13,791)(18,406) Operating Income (Loss) without Depreciation 28,520 34,502 46,414 44,177 77,164 $(40,000) $(20,000) $- $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 Storm Water Fund The Storm Water Fund experienced an increase in operating revenues of $11,207 or 10.2% from 2019 due more customers. Operating expenses increased, $15,822 or 12.8% from 2019 to 2020 due to increases in depreciation expense due to a large number of capital assets being recently added. The fund experienced an operating loss of $18,406 in 2020. Without depreciation included in operating expenses, the fund experienced operating income of $77,164. After factoring in non-operating items, capital contributions from developers and governmental funds and transfers, this fund's net position increased by $611,128. Unrestricted net position was $470,005 at December 31, 2020. 19 City of Otsego Emerging Issue Executive Summary The following is an executive summary of financial and business related updates to assist you in staying current on emerging issues in accounting and finance. This summary will give you a preview of the new standards that have been recently issued and what is on the horizon for the near future. The most recent and significant update includes: • Accounting Standard Update – GASB Statement No. 87 – Leases – GASB has issued GASB Statement No. 87 relating to accounting and financial reporting for leases. This new statement establishes a single model for lease accounting based on the principle that leases are financing of the right to use an underlying asset. The following is an extensive summary of the current update. As your continued business partner, we are committed to keeping you informed of new and emerging issues. We are happy to discuss these issues with you further and their applicability to your City. Accounting Standard Update – GASB Statement No. 87 – Leases The objective of this Statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This Statement increases the usefulness of governments' financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments' leasing activities. A lease is defined as a contract that conveys control of the right to use another entity's nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this Statement. A short-term lease is defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-term lease payments as outflows of resources or inflows of resources, respectively, based on the payment provisions of the lease contract. 20 City of Otsego Emerging Issue Accounting Standard Update – GASB Statement No. 87 – Leases (Continued) A lessee should recognize a lease liability and a lease asset at the commencement of the lease term, unless the lease is a short-term lease or it transfers ownership of the underlying asset. The lease liability should be measured at the present value of payments expected to be made during the lease term (less any lease incentives). The lease asset should be measured at the amount of the initial measurement of the lease liability, plus any payments made to the lessor at or before the commencement of the lease term and certain direct costs. A lessee should reduce the lease liability as payments are made and recognize an outflow of resources (for example, expense) for interest on the liability. The lessee should amortize the lease asset in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset. The notes to financial statements should include a description of leasing arrangements, the amount of lease assets recognized, and a schedule of future lease payments to be made. A lessor should recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term, with certain exceptions for leases of assets held as investments, certain regulated leases, short-term leases, and leases that transfer ownership of the underlying asset. A lessor should not derecognize the asset underlying the lease. The lease receivable should be measured at the present value of lease payments expected to be received during the lease term. The deferred inflow of resources should be measured at the value of the lease receivable plus any payments received at or before the commencement of the lease term that relate to future periods. A lessor should recognize interest revenue on the lease receivable and an inflow of resources (for example, revenue) from the deferred inflows of resources in a systematic and rational manner over the term of the lease. The notes to financial statements should include a description of leasing arrangements and the total amount of inflows of resources recognized from leases. GASB Statement No. 87 is effective for fiscal years beginning after June 15, 2021. Information provided above was obtained from www.gasb.org.