Management Report for City of Eden Prairie Minnesota December

Management Report for City of Eden Prairie, Minnesota December 31, 2006 To the City Council City of Eden Prairie, Minnesota We have prepared this management report in conjunction with our audit of the City of Eden Prairie’s (the City) financial records for the year ended December 31, 2006. The purpose of this report is to communicate information relevant to city finances in Minnesota and to provide comments resulting from our audit process. We have organized this report into the following sections: • • • • • Audit Summary Funding Cities in Minnesota Governmental Funds Overview Financial Trends and Analysis Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. This report is intended solely for the information and use of those who have responsibility for oversight of the financial reporting process. April 27, 2007 AUDIT SUMMARY The following is a summary of our audit work, key conclusions, and other information that we consider important or that is required to be communicated to the City Council and administration of the City. UNDERSTANDING THE AUDITOR’S RESPONSIBILITY We performed our audit in accordance with auditing standards generally accepted in the United States of America. The audit is designed to provide reasonable, but not absolute, assurance as to whether the City’s financial statements are free of material misstatement. The financial statements are the responsibility of the City’s management, while it is our responsibility to express an opinion on the financial statements based on our audits. AUDIT OPINION AND FINDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2006: • • • • We have issued an unqualified opinion on the City’s financial statements. We noted no matters involving the City’s internal control over financial reporting that we consider to be significant deficiencies or material weaknesses. The results of our testing disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. We have reported no findings based on our testing of the City’s compliance with Minnesota laws and regulations. Overall, we found the City’s financial records to be in excellent condition. This not only provides for an efficient year-end audit, but should also provide confidence in the interim financial data used to manage the City throughout the year. AUDIT ADJUSTMENTS For purposes of this report, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City’s financial reporting process (that is, cause future financial statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City, either individually or in the aggregate, indicated matters that could have a significant effect on the City’s financial reporting process. OTHER REQUIRED COMMUNICATIONS Auditing standards also require us to consider the following topics as potential areas that may need to be communicated to the appropriate officials or committee: • • • • • • • Significant accounting policies Significant estimates Other information in documents containing audited financial statements Disagreements with management Consultations with other accountants Major issues discussed with management prior to retention as auditors Difficulties encountered in performing the audit We did not encounter any circumstances and we are unaware of any items in any of these areas which we believe require further communication. -1- FUNDING CITIES IN MINNESOTA LEGISLATION The following is a brief summary of recent legislative activity affecting the finances of Minnesota cities: Local Government Aid (LGA) – Cities are still adapting to the formula changes for allocating LGA to cities that went into effect in 2004. The transition to the new formula will take many years, while creating fluctuations from year-to-year in the level of aid payments. Total funding of the LGA program increased by $48 million in 2006 and beyond, including $4 million to be distributed to cities with populations under 5,000, based on a per capita allocation. Market Value Homestead Credit (MVHC) – The MVHC cuts made to 2004 aid payments were extended through 2006 for 103 cities. Although homeowners received the full value of the MVHC credit, cities received $16 million less than the amounts subtracted from their tax levies for the reimbursement aid in 2006. The reimbursement cuts are scheduled to be restored in 2007. State Property Tax – The state property tax levy is split between commercial/industrial property and cabin property. For 2006, the tax rate was 50.82 percent for commercial/industrial property and 28.384 percent for cabins. PROPERTY TAXES Our past few management reports have tracked the evolution of property tax reform in Minnesota, and explained its impact on cities and their property owners. This included the phase-in of the class rate compression, changes in existing state property tax credit programs, creation of the Education Homestead Credit, elimination of the general education levy from the property tax roles, addition of a state property tax, MVHC, and MVHC cuts. Property values within Minnesota cities experienced strong growth in market values, increasing 13.0 percent in 2005 and 12.0 percent in 2006 state-wide. This growth results from both new construction and increases in existing property values. In comparison, the City’s market value increased by 7.9 percent in 2005 and 10.8 percent in 2006. The following graph shows the City’s changes in estimated market value over the past 10 years: Estimated Market Value $10,000,000,000 $8,000,000,000 $6,000,000,000 $4,000,000,000 $2,000,000,000 $– 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -2- Tax capacity is considered the actual base available for taxation. It is calculated by applying the state’s property classification system to each property’s market value. Each property classification has a different calculation and uses different rates. The graphs show that tax capacities have not increased at the same rate as market values, primarily due to property tax reform occurring over this period of time. The following graph shows the City’s change in tax capacities over the past 10 years: Taxable Tax Capacity $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $– 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Although it is impossible to consider every aspect and variable of local government spending, average tax rates are often used as a benchmark. Rates expressed as a percentage of net tax capacity All Cities State-Wide 2005 2006 Average tax rate City County School Special taxing Total 38.3 42.6 22.8 5.5 109.2 37.1 40.1 22.8 5.4 105.4 35.7 39.3 23.3 6.8 105.1 34.3 35.5 23.0 5.8 98.6 30.6 44.2 21.7 8.7 105.2 28.6 41.0 23.1 8.1 100.8 Seven-County Metro Area 2005 2006 City of Eden Prairie 2005 2006 The city portion of the net tax capacity rates for Eden Prairie residents have historically been below the state-wide and metro area averages. Meanwhile, the total tax rates for Eden Prairie residents have been very close to the seven-county metro area average in recent years. -3- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City’s governmental funds. Governmental funds include the General Fund, special revenue, debt service, and capital project funds. We have also included the most recent comparative state-wide averages available from the Office of the State Auditor. The reader needs to consider the effect of inflation and other known changes or differences when comparing this data. Also, certain data on these tables may be classified differently than how they appear on the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management’s Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. GOVERNMENTAL FUNDS REVENUE The amounts received from the typical major sources of revenue will naturally vary between cities based on their particular situation. This would include the City’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. The following table presents the City’s revenue per capita of its governmental funds for the past three years, together with state-wide averages: Governmental Funds Revenue per Capita With State-Wide Averages by Population Class Year Population Property taxes Tax increments Franchise fees and other taxes Special assessments Licenses and permits Intergovernmental revenues Charges for services Other Total revenue State-Wide December 31, 2005 2,500–10,000 10,000–20,000 20,000–100,000 $ 283 40 15 88 43 260 116 125 970 $ 276 52 23 69 33 272 95 108 928 $ 306 50 31 73 42 155 78 76 811 $ City of Eden Prairie 2004 2005 2006 62,603 64,032 64,846 400 27 9 30 49 63 41 100 719 $ 409 36 9 27 47 25 43 82 678 $ 439 37 10 33 45 67 46 95 772 $ $ $ $ $ $ The City’s governmental funds have typically generated slightly less revenue per capita in total than other Minnesota cities in its population class. The City receives considerably less intergovernmental revenue than average, as it no longer receives any LGA or MVHC. As a result, the City’s property tax revenue per capita has been higher than average. The City’s per capita governmental fund revenue for 2006 was $772, an increase of about 13.9 percent from the prior year. Intergovernmental revenues increased due to the City receiving more state aid for street improvement projects than in the previous year. -4- GOVERNMENTAL FUNDS EXPENDITURES Similar to our discussion of revenues, the expenditures of governmental funds will vary from state-wide averages and from year to year, based on the City’s circumstances. Expenditures are classified into three types as follows: • • Current – These are typically the general operating-type expenditures occurring on an annual basis, and are primarily funded by general sources such as taxes and intergovernmental revenues. Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year to year. Many of these expenditures are project oriented which are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. Debt Service – Although the expenditures for the debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. • The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Governmental Funds Expenditures per Capita With State-Wide Averages by Population Class Year Population Current General government Public safety Street maintenance and lighting Recreation All other State-Wide December 31, 2005 2,500–10,000 10,000–20,000 20,000–100,000 City of Eden Prairie 2004 2005 2006 62,603 64,032 64,846 $ 113 192 97 57 76 $ 103 201 94 76 105 $ 78 198 75 76 82 $ 159 160 79 69 33 $ 168 168 78 67 42 $ 167 180 84 66 38 $ Capital outlay and construction Debt service Principal Interest and fiscal 535 $ 579 $ 509 $ 500 $ 523 $ 535 $ 438 $ 335 $ 293 $ 181 $ 265 $ 187 $ 157 61 218 $ 142 50 192 $ 106 37 143 $ 62 15 77 $ 74 13 87 $ 51 20 71 $ $ $ $ $ $ The City’s per capita governmental fund operating expenditures for 2006 were $535, an increase of $12 (2.3 percent) per capita from the prior year. The increase is mostly due to the increase in public safety. The City’s capital outlay and debt service costs have been below average in recent years due to the status of the City’s infrastructure and stage of development. Capital outlay costs decreased to a more typical level in 2006, as a number of significant equipment purchases and construction projects inflated capital outlay costs in 2005. -5- FINANCIAL TRENDS AND ANALYSIS GENERAL FUND The City’s General Fund accounts for the financial activity of the basic services provided to the community. The primary services included within this fund are the administration of the municipal operation, police and fire protection, building inspection, streets maintenance, and parks and recreation. The following graph displays the City’s General Fund trends of financial position and changes in the volume of financial activity. Fund balance and cash balance are typically used as indicators of financial health or equity, while annual revenue is often used to measure the size of the operation: General Fund Financial Position Year Ended December 31, $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $– 2002 2003 Fund Balance 2004 Cash Balance 2005 Expenditures 2006 The City’s General Fund cash and investments balance at December 31, 2006 was $19,404,208, a decrease of $2,027,836 from the previous year. Total fund balance at December 31, 2006 was $19,187,692, a decrease of $2,144,687 from the prior year. Both of these decreases were due to a transfer of $3,200,000 made at year-end to create the Severance Internal Service Fund. The City has designated $18,042,399 of the General Fund balance for working capital and budget stabilization. Over the last few years, the City has generally been able to maintain or increase cash and fund balance levels, despite significant legislative cuts to state aid. This is an important factor because a government, like any organization, requires a certain amount of equity to operate. Generally, the amount of equity required typically increases as the size of the operation increases. A healthy financial position allows the City to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the adequate and consistent funding of services, repairs, and unexpected costs; and can be a factor in determining the City’s bond rating and resulting interest costs. -6- The following graph reflects the City’s General Fund reliance on its revenue sources for 2006: General Fund Revenue Taxes Licenses/Permits Intergovernmental Charges for Services Other $– $5,000,000 $10,000,000 Actual $15,000,000 Budget $20,000,000 $25,000,000 Total General Fund revenues for 2006 were $33,254,330, which was $1,610,894 (5.1 percent) over the final budget. Tax revenues were over budget by $558,332 (2.4 percent), due to the City’s policy to budget a conservative allowance for tax abatements and delinquencies of 2 percent of the current year levy. Charges for services were $324,268 over budget mostly due to additional common area maintenance revenue from CH Robinson and the Eden Prairie School District. Other revenues were over budget by $663,835, as investment income was about $641,000 over budget due to improved interest rates and a conservative budget in this area. The following graph presents the City’s General Fund revenue sources for the last five years: General Fund Revenue by Source Year Ended December 31, $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $– 2002 Taxes 2003 Licenses and Permits 2004 Intergovernmental 2005 2006 Other Charges for Services Overall, General Fund revenues increased $641,790 (2.0 percent) from the previous year. About $267,000 of this change was in charges for services, which increased due to the additional common area maintenance charges mentioned above. Investment income (reported in “other” revenue) also increased by almost $436,000 from the previous year. -7- The following illustrations provide you with the components of the City’s General Fund spending for 2006 and for the past five years: General Fund Expenditures General Government Public Safety Public Works Parks and Recreation Other $– $2,000,000 $4,000,000 $6,000,000 Actual Budget $8,000,000 $10,000,000 $12,000,000 Total General Fund expenditures for 2006 were $31,877,288, which was $564,106 (1.7 percent) under the final budget. The largest variance was in general government, where expenditures were about $808,000 under budget, mostly due to several information technology projects budgeted for 2006 that have not taken place yet, including document imaging upgrades, a police system interface, and electronic data conversion for the engineering division. Public safety expenditures were almost $351,000 over budget, mainly due to several capital outlays not anticipated in the budget, including new protective vests, specialized communication equipment, and additional security cameras at Eden Prairie Center. There was also an increase in wages and an increase in the number of, and length in stay of, prisoners housed by Hennepin County. General Fund Expenditures by Function Year Ended December 31, $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 2002 2003 General Governmental Public Works Other 2004 2005 Public Safety Parks and Recreation 2006 Overall, General Fund expenditures increased $1,182,672 (3.9 percent) from the prior year. Police public safety costs increased by about $582,000, mainly for the reasons described above. Fire public safety expenditures also increased by about $181,000 due to additional staffing for the new fire station and the purchase of $156,000 on new turnout gear. Inspection public safety costs increased about $96,000, mostly due to the addition of a new rental housing inspection position and severance costs related to the retirement of a full-time employee. -8- WATER/SEWER FUND The following graph presents five years of operating results for the Water/Sewer Fund: Water/Sewer Fund Year Ended December 31, $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 2002 2003 2004 2005 2006 Operating Revenue Operating Expenses Excluding Depreciation Operating Income (Loss) Before Depreciation During 2004, the City consolidated utility related debt service and capital project funds with that of the Water/Sewer Fund. The information for the previous year has not been changed to reflect this consolidation. The Water/Sewer Fund ended 2006 with net assets of $122,049,086, a decrease of $1,857,200 from the prior year. Of this, $113,343,039 represents the investment in capital assets, net of related debt, leaving $8,706,047 of unrestricted net assets. Water/Sewer Fund operating revenue was $10,062,691 for 2006, an increase of about $328,000. This increase was due to a combination of higher water consumption and higher water rates in 2006. Operating expenses (including depreciation of $3,897,693) were $11,908,799, which represents an increase of about $570,000 (5 percent). Most of the increase came in contractual services, supplies, and sewer disposal charges. -9- STORM DRAINAGE FUND The following graph presents five years of operating results for the Storm Drainage Fund: Storm Drainage Fund Year Ended December 31, $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $– $(100,000) 2002 2003 2004 Operating Revenue 2005 2006 Operating Expenses Excluding Depreciation Operating Income (Loss) Before Depreciation The Storm Drainage Fund ended 2006 with net assets of $26,806,700, a decrease of $596,374 from the prior year. Of this, $25,595,426 represents the investment in storm sewer collection system capital assets, leaving $1,211,274 of unrestricted net assets. Storm Drainage Fund operating revenues for 2006 were $602,728, an increase of about $2,500 from last year. Operating expenses for 2006 (including depreciation of $810,976) were $1,256,092, down approximately $81,000 from the prior year, mainly due to a decrease in repairs and maintenance. -10- LIQUOR OPERATIONS FUND The following graphs present five years of operating results for the Liquor Fund: Liquor Fund – Revenues and Expenses Year Ended December 31, $11,000,000 $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $– 2002 Sales 2003 Cost of Sales 2004 Other Revenues 2005 2006 Operating Expenses Liquor Fund – Operating Income Year Ended December 31, $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $– 2002 2003 2004 Operating Income 2005 2006 The Liquor Fund ended 2006 with net assets of $2,592,013, an increase of $447,829 from the prior year. Of this, $1,934,278 represents the investment in liquor capital assets, leaving $657,735 of unrestricted net assets. Liquor gross sales for 2006 were $10,158,292, a $365,635 (3.7 percent) increase from last year. The Liquor Fund generated a gross profit of $2,584,329 in 2006, or about 25.4 percent of gross sales. Operating expenses for 2006 were $1,636,402, about $83,000 higher than last year, primarily in contracted services. Net operating income for 2006 was $1,265,157, about 12.5 percent of gross sales. -11- GOVERNMENT-WIDE FINANCIAL STATEMENTS The City’s financial statements include fund-based information that focuses on budgetary compliance, and the sufficiency of the City’s current assets to finance its current liabilities. The Governmental Accounting Standards Board (GASB) Statement No. 34 reporting model also requires the inclusion of two city-wide financial statements designed to present a clear picture of the City as a single, unified entity. These city-wide statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. Statement of Net Assets The Statement of Net Assets essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Assets divides the net assets into three components: net assets invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. The following table presents the City’s net assets as of December 31, 2006 for governmental activities and business-type activities: Governmental Activities Calculation of net assets Current and other assets Net book value of capital assets Current liabilities Long-term liabilities Total net assets Categories of net assets Invested in capital assets, net of related debt Restricted Unrestricted Total net assets Business-Type Activities Total $ 77,710,013 172,686,628 (4,030,040) (42,892,436) 203,474,165 $ 12,232,813 146,659,757 (1,362,657) (6,082,114) 151,447,799 $ 89,942,826 319,346,385 (5,392,697) (48,974,550) 354,921,964 $ $ $ $ 133,041,891 6,298,693 64,133,581 203,474,165 $ 140,872,743 – 10,575,056 151,447,799 $ 273,914,634 6,298,693 74,708,637 354,921,964 $ $ $ The City’s total net assets at December 31, 2006 were $9,752,256 higher than at the beginning of the year. The increase in net assets came mostly in the governmental activities, which increased $11,758,001, as compared to a decrease of $2,005,745 (which includes a prior period adjustment decreasing net assets by $479,909) in the business-type net assets. The City’s unrestricted net assets, which are available to finance the day-to-day operations of the City, went up by $13,097,026. -12- Statement of Activities The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net assets. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in net assets of the City for the year ended December 31, 2006: Expenses Net (expense) revenue Governmental activities General government Public safety Public works Parks and Recreation Interest on long-term debt Business-type activities Utilities Liquor Total General revenues Property and tax increments Unrestricted grants and contributions Investment earnings Gain on sale of capital assets Total general revenues Change in net assets $ Program Revenue Net Difference $ 14,280,765 11,713,095 7,313,935 4,396,128 1,198,554 13,393,579 9,240,457 $ 3,218,255 4,496,155 4,068,483 2,910,530 – 11,059,503 10,454,446 $ (11,062,510) (7,216,940) (3,245,452) (1,485,598) (1,198,554) (2,334,076) 1,213,989 (25,329,141) $ 61,536,513 $ 36,207,372 30,952,857 190,446 2,986,563 1,431,440 35,561,306 10,232,165 One of the goals of this statement is to provide a side-by-side comparison to illustrate the difference in the way the City’s governmental and business-type operations are financed. The City’s governmental operations tend to rely more heavily on general revenues, such as property taxes and unrestricted grants. -13- ACCOUNTING AND AUDITING UPDATES GASB STATEMENT NO. 43 – FINANCIAL REPORTING FOR POST-EMPLOYMENT BENEFIT PLANS OTHER THAN PENSION PLANS AND GASB STATEMENT NO. 45 – ACCOUNTING AND FINANCIAL REPORTING BY EMPLOYERS FOR POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS These related statements provide new guidance on accounting and financial reporting of post-employment benefits accounted for in trust funds included in the financial statements of plan sponsors or employers, and employer accounting and reporting for post-employment benefits other than pensions by employers when the plan is not accounted for in their financial statements. Other post-employment benefits (OPEB) refer to non-pension benefits provided after the termination of employment. One example of this type of benefit is healthcare premiums paid by employers on behalf of former employees. Governmental entities have traditionally accounted for OPEB on a pay-as-you-go basis. Only a few governments have funded these benefits in advance of payment. The guidance in these statements rests on the assumption that OPEB should be accrued as an expense as service is provided by employees. For governments offering OPEB, the cost would be recognized using a three-step approach. The government will be required to project future benefits, discount those benefits to their present value, then use an acceptable actuarial method to allocate costs to individual accounting periods. Once calculated, the difference between the present value of OPEB benefits earned by employees as the result of past service and resources set aside to pay those benefits will be considered the “unfunded actuarial liability for OPEB.” Every employer will be allowed to start fresh at the time of transition to the new standard. There will be no requirement for an employer to recognize an accounting liability for under-funding prior to the implementation of the new standard. Instead, the unfunded actuarial accrued liability for OPEB at transition would be amortized over 30 years. As long as an employer funds the full amount of required contribution, no asset or liability will be reported on the Statement of Net Assets. However, an employer will need to report an asset or liability if the contributions are less or more than the annual required contribution each year. Nothing in the documents is intended to alter the normal application of modified accrual accounting in the governmental funds of the entity. Thus, OPEB expenditures normally would be recognized when payments are made to the former employees rather than when benefits are earned. The guidance will require that actuarial valuations for OPEB occur at least every two years for plans with 200 or more members, and every three years for plans with fewer than 200 members. A sole employer plan with fewer than 100 plan members has the option to apply a simplified alternative measurement method rather than obtain actuarial valuations. These statements will become effective in three phases based on the same criteria as those defined for the implementation of GASB Statement No. 34. GASB Statement No. 43 will be phased in for cities over a three-year period, starting with category one cities in the fiscal year ending December 31, 2006. GASB Statement No. 45 will be phased in over a three-year period, starting with category one cities in the fiscal year ending December 31, 2007. -14- GASB STATEMENT NO. 44 – ECONOMIC CONDITION REPORTING: THE STATISTICAL SECTION—AN AMENDMENT OF NCGA STATEMENT 1 This statement provides guidance for preparation of the statistical section of a comprehensive annual financial report (CAFR) for government entities. The goal of the statement is to improve the understandability and usefulness of the information presented in the statistical section by: improving comparability, focusing on information identified by users as being more useful, providing specific guidance for different types of governments, and incorporating the government-wide data required under the new GASB Statement No. 34 reporting model. While the statement only requires a statistical section to be presented when a government presents their basic financial statements within a CAFR, it will apply to any statistical section that accompanies a government’s basic financial statements. GASB Statement No. 44 was implemented by the City during the fiscal year ending December 31, 2006. GASB STATEMENT NO. 46 – NET ASSETS RESTRICTED BY ENABLING LEGISLATION—AN AMENDMENT OF GASB STATEMENT NO. 34 GASB Statement No. 34 requires that limitations on the use of net assets imposed by enabling legislation be reported as restricted net assets. In the process of applying this provision, some governments have had difficulty interpreting the requirement that those restrictions be “legally enforceable.” The confusion over this phrase has resulted in a diversity of practice that has diminished comparability. GASB Statement No. 46 clarifies that a legally enforceable enabling legislation restriction is one that a party external to a government—such as citizens, public interest groups, or the judiciary—can compel a government to honor. GASB Statement No. 46 also specifies the accounting and financial reporting requirements if new enabling legislation replaces existing enabling legislation or if legal enforceability is reevaluated. Finally, this statement requires governments to disclose the portion of total net assets that is restricted by enabling legislation. The requirements of GASB Statement No. 46 are effective for city financial statements for the year ending December 31, 2006. GASB STATEMENT NO. 47 – ACCOUNTING FOR TERMINATION BENEFITS GASB Statement No. 47 provides accounting and reporting guidance for state and local governments that offer benefits such as early retirement incentives or severance to employees that are involuntarily terminated. The statement requires that similar forms of termination benefits be accounted for in the same manner and is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements. GASB Statement No. 47 is effective for city financial statements for the year ending December 31, 2006, or may be implemented simultaneously with GASB Statement No. 45, depending on your circumstances. NEW STATEMENTS ON AUDITING STANDARDS The Auditing Standards Board of the AICPA has issued eight new statements on auditing standards. These statements establish standards and provide guidance concerning the auditor’s assessment of the risks of material misstatement (whether caused by error or fraud) in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks. Additionally, the statements establish standards and provide guidance on planning and supervision, the nature of audit evidence, and evaluating whether the audit evidence obtained affords a reasonable basis for an opinion regarding the financial statements under the audit. -15- The primary objective of these statements is to enhance the auditors’ application of the audit risk model in practice by specifying, among other things: • More in-depth understanding of the entity and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate them. More rigorous assessment of the risks of material misstatement of the financial statements based on that understanding. Improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks. • • Essentially, these statements are a continuation of the profession’s efforts to reestablish public confidence in the audit process in light of recent major corporate failures. It is anticipated that in most cases, these new standards will add a substantial amount of time to the typical audit, particularly for new engagements or when first implemented on continuing engagements. These statements are effective for city audits for the fiscal year ending December 31, 2007. -16-