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ITEM 1 End year financesITEM I CITY OF 0 t MINNESOTA MEMORANDUM TO: Mayor and City Council FROM: Lori Johnson, City Administrator DATE: April 4, 2013 SUBJECT: Preliminary 2012 Financial Review and 2013 Market Rate Adjustment At the November 26, 2012, Council meeting, the Council reviewed the 2013 budget and discussed 2013 pay. At that time, the Council directed staff to bring the pay item back to the Council in March when the end of year fund financial information was available. In addition, the Council requested a history of market rate adjustments. Attached is a memo from Finance Director Gary Groen outlining the estimated end of year balances along with the preliminary and unaudited Review of Financial Position and Results of Operations for the year ended December 31, 2012. The main focus of the financial review for the purposes of this item is the General Fund end of year variance from budget and the excess of revenue over expenditures. The 2013 levy did not include funding for a pay adjustment because the Council indicated a desire to use the end of year excess of revenues over expenditures, if one existed, to fund a market rate adjustment. That end of year information is now available. The projected excess of revenues over expenditures for 2012 is $182,267. Of that amount $43,267 'is needed to meet the fund balance policy of maintaining a fund balance of 45 pet -cent of the subsequent year's operating budget. The balance of $139,000 is available for use or for transfer to a reserve fund at the Council's discretion in accordance with the fund balance policy. Next the Council requested a recent history of market rate adjustments. For- the years 2009 to 2011 no market rate adjustments were made. For 2012 a 1,5 percent adjustment was made to the pay plan. Data prior to 2009 is not relevant as a new pay plan was adopted in 2009 and the pay plan was readjusted to market or a percentage of average market according to the Council's direction at that time based on a comparison of comparable cities. A survey of the comparable cities indicated that based on 2011 pay rates tsego's pay plan was comparable to the average pay of those cities for the most part and only slightly below for the higher pay grades. Although I do not know the Council's full intent when the pay plan was revised in 2009, 1 assume it was to create a pay plan that was in the middle range of the comparable cities and to maintain that position on an annual basis thus eliminating the need for larger one-time adjustments in the future. A review of 2012 and 2013 pay adjustments for similar cities indicates that most cities gave an increase of two percent for 2013. Of course, there were a handful of cities on either end of that some giving less, including a few that gave no increase and a few giving up to three percent. As I stated earlier, Otsego approved a 1.5 percent market rate adjustment in 2012 which was close to the average for other cities. If the Council's intent is to maintain a position in the middle of the pay for comparable cities, an increase comparable to the other cities is warranted. Finally, the total cost of each percent of market rate adjustment, including PERA and FICA, is approximately $9,500. As I stated earlier, funding for a market rate adjustment was planned to come from the $x.39,000 end of year balance. 0 CITY OF Ot e 0 MINNESOTA'g MEMORANDUM TO: Mayor and City Council FROM: Gary goer, Finance Director DATE: April 4, 2013 SUBJECT: Preliminary 2012 Financial Review During the budget process, the Council discussed whether the compensation plan should include a market value adjustment for 2013. The decision on a market value adjustment was deferred until the preliminary 2012 financial information was available. The Council directed the finance department to provide the Council with preliminary 2012 financial information in March 2013. The process was slightly delayed with the implementation of the new finance software system. The preliminary information is unaudited and is provided in accordance with your request. The preliminary report on the December 31, 2012 financial position and results of operations includes an overview of all funds except the debt service funds. The General Fund is presented in greater detail than the other funds of the City. Page Two includes a statement of the revenue, expenditures and changes in fund balance for the year ended December 31, 2012. The budget and actual expenditures are summarized by department to provide an overview of the variances, both favorable and unfavorable. I have briefly explained some of the more significant variances. In accordance with the fund balance policy the increase in fund balance that exceeds 45% of the subsequent year's expenditures ($139,000) has been transferred to the Revolving Capital Improvements Fund. However, the use of that money is at the discretion of the Council. The debt service funds are not included because the recent agreement with G will greatly impact those fund balances. The payment of special assessments and general property taxes will be received from the County in July and updated debt service funds will be provided at that time. If you have any questions, please feel free to contact me. CITY OF OTSEGO REVIEW OF FINANCIAL POSITION AND RESULTS OF OPERATIONS PRELIMINARY - UNAUDITED YEAR ENDED DECEMBER 31, 2012 The following is a preliminary review ew of the unaudited financial position and results of operations of the various ffinds of the City for the year ended December 31, 2012. Tile audit will begin oil Monday, April 15. 1 do not expect any significant adjustment to these balances during the audit. The preliminary review of the General Fund includes a review of the budget and actual revenue and expenditures and changes in fund balance. The review of the other funds of the City will be much more sunuilarized. General Fund The City accounts for the general government services provided to the citizens through the General Fund, These services include public safety, public works, parks and recreation, and general govermnent. The services are financed primarily through the general property taxes. The fund balance is the balance of assets remaining at year end to finance future year's operations and provide cash flow throughout the year. The Office of State Auditor has suggested that a fund balance of approximately 40 - 50% of the subsequent year's budgeted expenditures should be maintained from year to year. The City Council has adopted a policy that establishes the Rind balance at 45% of the subsequent year's expenditure budget. The Genet -al Fund fund balance is $1,665,697 and, in accordance with the policy, the additional net revenue totaling $139,000 was transferred to the Revolving Capital Improvements Fund. The transfer an cunt may be adjusted based on any unexpected audit adjustments. The Rind balance amount should be sufficient for cash flow purposes and to absorb unexpected revenue shortfalls or unexpected expenditures that were not budgeted. Page Two A summary of the 2012 revenue, expenditures an changes in ftind balance is as follows: General Fund Statement ofl event, Expenditures and Changes in Fund Balance Budget and. Actual Year Ended December 31, 2012 Revenue General Property Taxes Licenses and Permits Intergovernmental Charges for Services Miscellaneous Interest on Investments Gable franchise Fee Other Total Revenue Expenditures City council Administration Elections Assessor Finance Infonnation Technology Legal Services General Government Buildings Police Services Fire Protection Services Emergency Management Animal Control Streets Engineering Street Lights Park Maintenance Recreation IIP+C Planning Commission Planner Economic De elopmeW Total E Penditures Excess of Revenue Over ENpendittires Transfer to l evolving Capital Iinprovement Fend Net Increase in Fund Balance Fund Balance, Janauary 1, 2012 Budget Actual Varhmce 3,108,1 5 35139,131 30,966 15P000 33,915 185915 193,872 208,822 14x950 12,500 595995 47,495 1009000 9704 (2531 1002000 106,547 6,547 30,500 35,422 41922 395609037 39681,51 121,479 639627 51,273 12,354 382,210 376,582 51628 119000 241344 13,344) 709000 67,904 2,{19+6 2399185 239,680 (495) 323000 35,108 3} 10 709000 715305 (1,305) 529920 39,850 13,170 875,060 876,417 19357) 3459000 3479922 (23922) 29500 728 15772 14,400 10,915 39485 7965480 7545120 423360 11700 1285713 (115713) 105,000 108,775 (39775) 221,155 193,456 272699 67,500 823018 (14,518) 1,700 15134 566 800 13230 (430) 80,000 853126 (5, 126) 12,500 236149 95851 355603037 3,4992249 605788 18232+67 182,267 (1399000) (139,000) 43,267 43,267 1 611 din Fund Balance, December 31, 2012 10507 Page Three The total actual revenue is $3,681,516 compared to the budgeted revenue of $3,560,037, or about 3.4% more than. budgeted. The variance is spread fluoughout the revenue categories. The property tax revenue includes nearly $14,000 in penalties and interest. The licenses and permit revenue includes additional liquor licenses and the 2013 revenue budget has been adjusted accordingly. The intergovernmental revenue includes nearly $ 10,000 additional MSA maintenance money. The charges for services include $21,115 of charges from the public works — street department for work projects charged to other funds. The projects include work completed for the Otsego Creek Watershed, other Storm Water Districts and Park Development Funds. The actual expenditures totaled $3,499,249 compared to the budgeted expenditures of $3,560,037, or 1.7% less than anticipated. Please contact me if you would like additional explanations or the detail of any of the budget variances. During the startup of the City's recreation programming, there was discussion about financing the net cost of the first year's operations with monies from the Council contingency budget. It was estimated the net cost would be approximately $12,000. The net recreation expenditures (actual expenditures, $14,040, exceeded the revenue generated, $8,840) totaled $5,200. This budget transfer of $5,200 from the Council contingency to the recreation budget should be approved by the Council. The variances by department are very small and a few of the highlights follow. The more significant variances include: City Council — The council budget includes a contingency budget of $31,235. Of this amount, $16,493 was spent. With the requested transfer to finance the first year net cost of the recreation program, the total Council unexpended budget balance totals $7,154. Elections — The 2012 election expenditures include the purchase of equipment totaling. $9,191. The County reimbursed the City for 50% of this cost and the reimbursement is included in the General Fund revenue. In addition, the election judges pay totaled $9,080 compared to the $6,000 budgeted because of the two polling locations required for the 2012 election. Sti-ects - The street department spent $42,360 less than budgeted. The salt and sand budget was $75,000 and the actual expenditures totaled $24,271. This is a result of the mild winter frons 2010/2011 and the resulting inventory held over. However, it should also be noted the 2013 budget is again $75,000 but there is I ittle or no 'Inventory held over from this past winter's street maintenance. Reer-eation - The recreation budget includes programming for the first year. This was discussed in the City Council budget above. Page Four Capital ResBei -ve Funds The Capital Reserve Funds account for specific revenues set aside to finance specific expenditures. The accounts include monies for pavement and trail management, fire capital reserve, park development, equipment and other future public improvements. The capital reserve fund balances are compared to the December 31, 2011 balances and also are compared to the beginning fund balances in the 2013 CIP. The 2013 CIP beginning balances (12/31/12 projected balances in September 2012) are provided to also assure the Council that the CIP projected fund balances are reasonable in comparison with the actual year end balances. The Rind balances of the capital resei-ve funds are as follows: Capital Reserve Funds Fund Balances December 31, 2012aTld 2011 and CIP Projected Fund Balan ces The CIP fund balance of the Otsego Municipal Building Fund has been reduced by the transfer of $474,500 to the Public Works Facility Debt Service Fund approved in 2012 but is included in the CIP document as a 2013 transfer. The Revolving Capital Improvements Fund has been reduced by the transfer of $208,825 for the 2004 Quaday Debt Service Fund approved in 2012 but included in the CIP document as a 2013 transfer. The Revolving Capital Improvements Fund has also been increased by the $139,000 transfer from the General Fund in accordance with the fund balance policy. 12/31/2012 Fund flr(�iected NUmber 12/31/12 12/31/11 CIP 13('11alice Street Pavement Management 201 599,767 885,893 $ 595,000 Trail Pavement MaTUDgMICIA 202 15,712 46,696 10,000 Park Development 203 352,617 388,122 340,000 Park EqUipment Capital Reserve 205 102,945 84,381 93,000 Capital Equipment Revolving 206 498,536 4461453 480) 000 Community Facilities 208 752,222 761,202 735,000 Collector Street Reconstruction 209 263,425 263,581 263,000 Fire Capital Reserve 214 11422,751 1)2365862 1,380,00 Collector Roads Fund 403 446,166 473,197 445,000 Watershed Districts 405-410 228,703 238,206 213,682 Revolving Capital Improvements 414 755,339 151579427 615,000 Otsego Municipal Building Fund 441 61,089 535,589 60,500 The CIP fund balance of the Otsego Municipal Building Fund has been reduced by the transfer of $474,500 to the Public Works Facility Debt Service Fund approved in 2012 but is included in the CIP document as a 2013 transfer. The Revolving Capital Improvements Fund has been reduced by the transfer of $208,825 for the 2004 Quaday Debt Service Fund approved in 2012 but included in the CIP document as a 2013 transfer. The Revolving Capital Improvements Fund has also been increased by the $139,000 transfer from the General Fund in accordance with the fund balance policy. Page Five The Watershed district Rind balance is reduced by the deficit fund balances in the other watershed districts to make the information comparable. The Park Equipment Capital Reserve Fund included $15,000 set aside for startup equipment costs for the park and recreation programs. Of that amount $4,808 was spent in 2012 (net of the $4,000 donation for movie equipment), leaving a remaining balance of $10,192 to be spent from this reserve account. The fund balance at December 31, 2012 in the Park Equipment Capital Reserve is $102,945 and includes the remaining startup monies for recreation equipment. Building Safety Fund At December 31, 2011, the Building Safety Fund reported a fund balance deficit of $693,033. The 2012 revenues totaled $562,460 and the expenditures totaled $204,925, thereby reducing the deficit by $357,535. The fund balance deficit at December 31, 2012 in the Building Safety Fund is $335,498. The building permit revenue far exceeded expectations with 140 homes built in 2012 compared to 58 in 2011. In addition, the allocation of administrative costs from the General Fund to the Building Safety Fund was reduced from $138,800 in 2011 to $25,000 in 2012. The combination of the increased revenue and the reduced cost allocation resulted in the Rind balance deficit being reduced significantly. Water and Sewer Utility Funds Debt Service - The biggest concern with the water and sewer utility Rinds has been the ability of the water and sewer funds to support the future debt service obligations. The recently completed utility rate study has answered the question. The water and sewer debt service funds have a combined cash and investment balance of $5,250,645 at December 31, 2012. The debt service Rinds are used to collect the water and sewer connection fees generated by new connections to the system. (This is reported infunds 360and 361). In addition to the money collected from new connections, additional revenue for debt service is generated by the water and sewer operating Rinds. Water Operations — The actual 2012 water revenue totaled $1,073,600 and the operating expenses, excluding depreciation, totaled $413,500. The net revenue from operations was $6603100 and increased the cash and investment balance in the water fund to $1,830,,300 at year end. Sewer Operations - The actual 2012 sewer revenue totaled $1,071,669 and the operating expenses, excluding depreciation, totaled $764,510. The net revenue frorn operations was $307,159 and increased the cash and investment balance in the sewer fund to $1,1325192 at year end. Page Six The combined cash and investment balance in the water and sewer operating funds totals $2,962,492 and the cash and investment balance in the related debt service funds totals $5,250M5. The total debt outstanding is $27,660,000. Overall The City's cash and investment portfolio totals $17,260,663 at year-end. Of this amount $15,594,479 was invested in certificates of deposit and other authorized investments, $1,578,222 was invested in money market accounts, and the checking account had a balance of $87,962. The City earned $355,235 in interest on available funds during 2012 with an estimated overall return of 2.24%. Of the interest earned, the budget allocates the first $70,000 to the General Fund as an administrative charge and the remaining interest wined is allocated to the other funds based on their respective average cash balance throughout the year.