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4.1 DO NOT PRINT - Communications Letter City of Otsego Wright County, Minnesota Communications Letter December 31, 2023 City of Otsego Table of Contents Report on Matters Identified as a Result of the Audit of the Basic Financial Statements 1 Significant Deficiency 3 Required Communication 4 Financial Analysis 9 Emerging Issues 20 1 Report on Matters Identified as a Result of the Audit of the Basic Financial Statements Honorable Mayor, Members of the City Council and Management City of Otsego Otsego, Minnesota In planning and performing our audit of the basic 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, 2023, 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. However, as discussed below, we identified certain deficiencies in internal control that we consider to be significant deficiencies. 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 basic 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. 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. 2 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 June 6, 2024, on such statements. The purpose of this communication, which is an integral part of our audit, is to describe for the Members of the City Council and management and others within the City and state oversight agencies the scope of our testing of internal control and the results of that testing. Accordingly, this communication is not intended to be and should not be used for any other purpose. St. Cloud, Minnesota June 6, 2024 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 basic 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, 2023. 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 basic 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 basic 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 basic financial statements are free of material misstatement. An audit of the basic 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 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 basic financial statements, as described by professional standards, is to evaluate the presentation of the supplementary information in relation to the basic financial statements as a whole and to report on whether the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. Our responsibility with respect to the other information in documents containing the audited basic financial statements and auditor’s report does not extend beyond the basic 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 basic 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 basic 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. Significant Risks Identified We have identified the following significant risks of material misstatement: Risk of Improper Revenue Recognition – Revenue recognition is considered a fraud risk on substantially all engagements as it is generally the largest line item impacting a City’s change in fund balance or net position. Risk of Misappropriation of Assets – If duties cannot be appropriately segregated within finance department, there is a risk of misappropriation of assets. Risk of Management Override of Controls – Management override of internal control is considered a risk in substantially all engagements as management may be incentivized to produce better results. Pension Valuation – Net Pension Liability, Deferred Outflows of Resources Related to Pensions, and Deferred Inflows of Resources Related to Pensions – These are generally material to the financial statements and involve significant estimates. Recording of Capital Assets and Related Payables – Due to the significant capital activity there is a risk of error in recording capital assets and related payables. 6 City of Otsego Required Communication Qualitative Aspects of the City’s 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 the basic financial statements. There have been no initial selection of accounting policies and no changes to significant accounting policies or their application during 2023. 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. Significant Accounting Estimates Accounting estimates are an integral part of the basic 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 basic 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 basic financial statements relate to: 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 basic financial statements taken as a whole and in relation to the applicable opinion units. Financial Statement Disclosures Certain basic financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The basic 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 basic financial statements taken as a whole and each applicable opinion unit. Uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misstated, even though the uncorrected misstatements are immaterial to the financial statements currently under audit. Right to use assets and lease liabilities are understated. 7 City of Otsego Required Communication Uncorrected and Corrected Misstatements (Continued) 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 basic financial statements taken as a whole. 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 basic 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, significant events or transactions that occurred during the year, operating and regulatory conditions affecting the City, and operational 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 Included in Annual Reports Pursuant to professional standards, our responsibility as auditors for other information, whether financial or nonfinancial, included in the City’s annual reports, does not extend beyond the information identified in the audit report, and we are not required to perform any procedures to corroborate such other information. 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 basic financial statements or to the basic financial statements themselves. 8 City of Otsego Required Communication Other Information Included in Annual Reports (Continued) We were not engaged to report on the other information accompanying the basic 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. Our responsibility also includes communicating to you any information which we believe is a material misstatement of fact. Nothing came to our attention that caused us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the basic financial statements. 9 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, 2023, revenues for the City’s General Fund totaled $8,156,341. This represents an increase of $324,084, or 4.1%, from 2022. General Fund expenditures totaled $7,737,399 in 2023, which is an increase of $629,474, or 8.9%, from 2022. Revenue and expenditure activity, combined with net other financing sources of $388,870, resulted in an increase in fund balance of $30,072 in 2023. The ending General Fund balance of $4,981,515 is further broken down into spending categories; $338,076 is for nonspendable fund balances which is made up of $135,876 of prepaid items and $202,200 of assets held for resale. In addition, $277,297 is assigned for insurance deductibles and $65,564 is assigned for educational programs. An amount of $465,819 is restricted for public safety purposes. This leaves $3,834,759 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, 2023, represents 52.9% of 2024 budgeted expenditures of $9,420,452. 2019 2020 2021 2022 2023 Total Revenues $6,692,859 $9,055,697 $7,805,004 $7,832,257 $8,156,341 Total Expenditures 5,686,890 6,657,325 6,401,090 7,107,925 7,737,399 Fund Balance 4,319,810 5,987,733 5,199,901 4,951,443 4,981,515 $- $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 10 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 $324,084, or 4.1%, from 2022. Taxes increased $223,802 due to an increased tax levy. Licenses and Permits decreased $579,041 due to fewer permits being issued in 2023. Charges for services decreased $204,272 due to fewer permits being issued in 2023. Intergovernmental revenues increased $467,789 due to one time public safety aid received from the state. Investment income increased $445,272 due to better market conditions. Other sources of revenue stayed consistent with the prior year. 2019 2020 2021 2022 2023 Investment Income $155,709 $177,948 $(48,486)$(149,701)295,571 Other 108,364 61,688 86,065 117,335 87,939 Intergovernmental 88,328 1,396,214 88,037 107,732 575,521 Charges for Services 310,871 257,198 427,809 476,632 272,290 Licenses and Permits 1,699,879 2,532,789 2,529,588 2,123,810 1,544,769 Taxes 4,329,708 4,629,860 4,721,991 5,156,449 5,380,251 $(2,000,000) $- $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 General Fund Revenues 11 City of Otsego Financial Analysis General Fund Revenues (Continued) The allocation of revenues by source within each major classification is presented below for 2023 and 2022. The City continues to rely on tax revenue as the majority of its General Fund revenue, accounting for 66.0% of its total revenue in 2023. Licenses and Permits decreased to 18.9% due to fewer permits being issued in 2023. Intergovernmental revenues increased to 7.1% due to receiving a one time public safety aid from the state in 2023. Other sources of revenue were fairly consistent with the prior year. Taxes 66.0% Intergovernmental 7.1% Licenses and Permits 18.9%Charges for Services 3.3% Investment Income 3.6% Other 1.1% 2023 General Fund Revenues Taxes 65.8%Intergovernmental 1.4% Licenses and Permits 27.1% Charges for Services 6.1%Investment Income -1.9% Other 1.5% 2022 General Fund Revenues 12 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 $5,487,550 $92,300 $1,695,523 $268,776 $76,000 $35,900 Actual 5,380,251 575,521 1,544,769 272,290 295,571 87,939 $- $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 $5,500,000 $6,000,000 2023 General Fund Revenues Budget and Actual Overall, actual revenue exceeded budgeted revenue by $500,292, or 6.5%. The largest variance was for intergovernmental which was $483,221 over budget. This was the result of not budgeting for the one time public safety aid received from the state in 2023. The second largest variance was investment income was over budget $219,571 due to better than anticipated market conditions. Licenses and permits revenue was under budget $150,754 due to issuing fewer permits than anticipated. Taxes revenue was under budget $100,893 due to budgeting to collect the full levy amount. The remaining revenue sources were consistent with budgeted amounts. 13 City of Otsego Financial Analysis General Fund Expenditures As discussed previously, total General Fund expenditures increased $629,474, or 8.9%, from 2022. Public works expenditures increased $190,725 due to additional staff, additional vehicles, as well as increased snowplowing costs related to the 2022 plowing season. Public safety expenditures increased $242,826 due to an increase in the County contract. General government expenditures increased $104,316 due to a increased wages and benefits in 2023. Parks and recreation expenditures increased $91,548 due to adding an additional full time staff. In addition to the above, the City implemented a compensation study in quarter four of 2023. 2019 2020 2021 2022 2023 General Government $1,227,565 $1,419,635 $1,358,500 $1,574,091 $1,678,407 Public Safety 2,379,440 2,667,435 2,879,409 3,080,382 3,323,208 Public Works 1,250,718 1,204,664 1,287,788 1,503,871 1,694,596 Parks and Recreation 715,026 699,793 784,145 857,852 949,400 Economic Development 114,141 665,798 91,248 91,729 91,788 $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 General Fund Expenditures 14 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 was consistent with the prior year. 15 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 $1,783,425 $3,406,292 $1,737,827 $935,745 $113,360 Actual $1,678,407 3,323,208 1,694,596 949,400 91,788 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 2023 General Fund Expeditures Budget and Actual Overall, actual expenditures were under budgeted amounts by $239,250, or 3.0%. General Government had the largest variance, coming in $105,018 under budget. This variance is due to budgeting conservatively and having unused contingencies. Public Safety expenditures were under budget by $83,084 due to building inspection costs being budgeted similarly to revenues. The other functions were consistent with the budgeted amounts. 16 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 2019 through 2023. Comparing 2019 through 2023, the City’s tax capacity has increased $12,941,892, or 69.6%, to $31,550,432. The City’s certified levy increased $2,619,914, or 39.0%, over the same time frame. As a result, the City’s tax capacity rate has decreased from 36.1% in 2019 to 29.6% in 2023. When comparing 2022 to 2023 the chart indicates that even with a levy increase of $745,018 the tax rate decreased from 34.6% to 29.6% due to a $6,697,561 increase in the total tax capacity. $6,710,109 $7,194,249 $7,828,425 $8,585,005 $9,330,023 $18,608,540 $20,497,278 $22,591,258 $24,852,871 $31,550,432 36.06%35.10%34.65% 34.55% 29.57% 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 $30,000,000 $35,000,000 2019 2020 2021 2022 2023 Tax Capacity, Levy, and Rates Tax Levy Total Tax Capacity Tax Capacity Rate 17 City of Otsego Financial Analysis Water Fund 2019 2020 2021 2022 2023 Operating Revenues $1,626,076 $2,013,487 $2,873,324 $2,904,563 $3,517,118 Operating Expenses 1,447,050 1,289,632 1,854,678 2,168,129 2,341,225 Operating Income with Depreciation 179,026 723,855 1,018,646 736,434 1,175,893 Operating Income without Depreciation 771,993 1,352,583 1,722,474 1,495,022 2,058,476 $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 Water Fund The Water Fund experienced operating income of $1,175,893 in 2023. 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 2023, the City experienced operating income of $2,058,476 with depreciation expense factored out of operating expenses. Depreciation expense amortizes the original cost of fund capital assets over their estimated useful lives. In 2023, operating revenues increased $612,555, or 21.1%, while operating expenses increased $173,096, or 7.9%. Revenues increased due to an increased number of customers, increased usage and increased rates. Operating expenses increased due to a wellfield study and increased depreciation expense. 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 $3,004,171. Unrestricted net position was $10,476,324 at December 31, 2023. 18 City of Otsego Financial Analysis Sewer Fund 2019 2020 2021 2022 2023 Operating Revenues $2,246,688 $2,469,354 $3,028,939 $3,539,069 $4,082,829 Operating Expenses 2,097,663 2,414,741 2,785,098 3,447,706 3,535,347 Operating Income (Loss) with Depreciation 149,025 54,613 243,841 91,363 547,482 Operating Income without Depreciation 1,137,333 1,080,702 1,310,055 1,619,767 2,124,040 $- $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 $2,750,000 $3,000,000 $3,250,000 $3,500,000 $3,750,000 $4,000,000 $4,250,000 Sewer Fund In 2023, the Sewer Fund generated an operating income for the fifth time in the five years presented. In 2023, the Sewer Fund experienced an operating income of $547,482 with depreciation. Operating revenues increased $543,760 or 15.4% over the prior year, while operating expenses increased $87,647, or 2.5%. The increase in operating revenues was due to an increase in rates, number of customers, and usage. The increase in operating expenses was due to increased depreciation expense and utility and chemical costs related to the increased usage. The operating income in 2023 was a result of increasing rates to assist in covering operating expenses and has experienced an increase in users. Without depreciation, operating income totaled $2,124,040. 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 $5,840,816. Unrestricted net position was $26,683,071 at December 31, 2023. 19 City of Otsego Financial Analysis Storm Water Fund 2019 2020 2021 2022 2023 Operating Revenues $109,372 $120,579 $122,200 $137,178 $143,961 Operating Expenses 123,163 138,985 188,245 218,612 224,368 Operating Income (Loss) with Depreciation (13,791)(18,406)(66,045)(81,434)(80,407) Operating Income (Loss) without Depreciation 44,177 77,164 70,273 96,782 114,369 $(100,000) $(50,000) $- $50,000 $100,000 $150,000 $200,000 $250,000 Storm Water Fund The Storm Water Fund experienced an increase in operating revenues of $6,783 or 4.9% from 2022 due to more customers. Operating expenses increased, $5,756 or 2.6% from 2022 to 2023 due to increases in depreciation expense due to a large number of capital assets being recently added. The fund experienced an operating loss of $80,407 in 2023. Without depreciation included in operating expenses, the fund experienced operating income of $114,369. After factoring in non-operating items, capital contributions from developers and governmental funds and transfers, this fund’s net position increased by $879,686. Unrestricted net position was $831,064 at December 31, 2023. 20 City of Otsego Emerging Issues Executive Summary The following is an executive summary of financial 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 updates include: Implementation Guide No. 2021-1 – Amending Capitalization Requirements GASB has issued Implementation Guide No. 2021-1, amending previously issued guidance regarding capitalization requirements for capital assets that are significant in the aggregate but below the government’s capitalization threshold individually. Accounting Standard Update – GASB Statement No. 100 – Accounting Changes and Error Corrections GASB has issued GASB Statement No. 100 relating to accounting and financial reporting for accounting changes and error corrections. The requirements of this Statement will improve the clarity of the accounting and financial reporting requirements for accounting changes and error corrections, which will result in greater consistency in application in practice. In turn, more understandable, reliable, relevant, consistent, and comparable information will be provided to financial statement users for making decisions or assessing accountability. Accounting Standard Update – GASB Statement No. 101 – Compensated Absences GASB has issued GASB Statement No. 101 relating to accounting and financial reporting for compensated absences. The unified recognition and measurement model in this Statement will result in a liability for compensated absences that more appropriately reflects when a government incurs an obligation. In addition, the model can be applied consistently to any type of compensated absence and will eliminate potential comparability issues between governments that offer different types of leave. The following are extensive summaries of the current updates. 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 its applicability to your City. Implementation Guide No. 2021-1 – Amending Capitalization Requirements Implementation Guide No. 2021-1, amended previously issued guidance contained in Implementation Guide No. 2015-1 regarding capitalization requirements for capital assets that are significant in the aggregate. Original guidance stated that it may be appropriate for a government to establish a capitalization policy that would require capitalization for certain types of assts with individual acquisition costs that are less than the threshold for an individual asset. Amended guidance states that a government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant. Computers and classroom furniture are common examples of asset types that could be significant collectively. The amended guidance clarifies that if 100 computers costing $1,500 each totaling a $150,000 aggregate amount is significant, the government should capitalize the computers. Information provided above was obtained from www.gasb.org. 21 City of Otsego Emerging Issues Accounting Standard Update – GASB Statement No. 100 – Accounting Changes and Error Corrections – an Amendment of GASB Statement No. 62 The primary objective of this Statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable , reliable, relevant, consistent, and comparable information for making decisions or assessing accountability. This Statement defines accounting changes as changes in accounting principles, changes in accounting estimates, and changes to or within the financial reporting entity and describes the transactions or other events that constitute those changes. As part of those descriptions, for (1) certain changes in accounting principles and (2) certain changes in accounting estimates that result from a change in measurement methodology, a new principle or methodology should be justified on the basis that it is preferable to the principle or methodology used before the change. That preferability should be based on the qualitative characteristics of financial reporting – understandability, reliability, relevance, timeliness, consistency, and comparability. This Statement also addresses corrections of errors in previously issued financial statements. This Statement prescribes the accounting and financial reporting for (1) each type of accounting change and (2) error corrections. This Statement requires that (a) changes in accounting principles and error corrections be reported retroactively by restating prior periods, (b) changes to or within the financial reporting entity be reported by adjusting beginning balances of the current period, and (c) changes in accounting estimates be reported prospectively by recognizing the change in the current period. The requirements of this Statement for changes in accounting principles apply to the implementation of a new pronouncement in absence of specific transition provisions in the new pronouncement. This Statement also requires that the aggregate amount of adjustments to and restatements of beginning net position, fund balance, or fund net position, as applicable, be displayed by reporting unit in the financial statements. This Statement requires disclosure in notes to financial statements of descriptive information about accounting changes and error corrections, such as their nature. In addition, information about the quantitative effects on beginning balances of each accounting change and error correction should be disclosed by reporting unit in a tabular format to reconcile beginning balances as previously reported to beginning balances as restated. Furthermore, this Statement addresses how information that is affected by a change in accounting principle or error correction should be presented in Required Supplementary Information (RSI) and Supplementary Information (SI). For periods that are earlier than those included in the basic financial statements, information presented in RSI or SI should be restated for error corrections, if practicable, but not for changes in accounting principles. GASB Statement No. 100 is effective for reporting periods beginning after June 15, 2023. Earlier application is encouraged. Information provided above was obtained from www.gasb.org. 22 City of Otsego Emerging Issues Accounting Standard Update – GASB Statement No. 101 – Compensated Absences The objective of this Statement is to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures. This Statement requires that liabilities for compensated absences be recognized for (1) leave that has not been used and (2) leave that has been used but not yet paid in cash or settled through noncash means. A liability should be recognized for leave that has not been used if (a) the leave is attributable to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means. Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Leave that accumulates is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid or settled. In estimating the leave that is more likely than not to be used or otherwise paid or settled, a government should consider relevant factors such as employment policies related to compensated absences and historical information about the use or payment of compensated absences. However, leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be included in a liability for compensated absences. This Statement requires that a liability for certain types of compensated absences – including parental leave, military leave, and jury duty leave – not be recognized until the leave commences. This Statement also requires that a liability for specific types of compensated absences not be recognized until the leave is used. This Statement also establishes guidance for measuring a liability for leave that has not been used, generally using an employee’s pay rate as of the date of the financial statements. A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary-related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities. With respect to financial statements prepared using the current financial resources measurement focus, this Statement requires that expenditures be recognized for the amount that normally would be liquidated with expendable available financial resources. This Statement amends the existing requirement to disclose the gross increases and decreases in a liability for compensated absences to allow governments to disclose only the net change in the liability (as long as they identify it as a net change). In addition, governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences. GASB Statement No. 101 is effective for reporting periods beginning after December 15, 2023. Earlier application is encouraged. Information provided above was obtained from www.gasb.org.