City of Park Rapids Hubbard County, Minnesota. Financial Statements. December 31, 2016

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1 Hubbard County, Minnesota Financial Statements December 31, 2016

2 Table of Contents Elected Officials and Administration 1 Independent Auditor's Report 2 Management's Discussion and Analysis 5 Basic Financial Statements Government-Wide Financial Statements Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements Balance Sheet Governmental Funds 18 Reconciliation of the Balance Sheet to the Statement of Net Position Governmental Funds 21 Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds 22 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities Governmental Funds 24 Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual General Fund 25 Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual Airport Special Revenue Fund 27 Statement of Net Position Proprietary Funds 28 Statement of Revenues, Expenses, and Changes in Fund Net Position Proprietary Funds 30 Statement of Cash Flows Proprietary Funds 32 Statement of Fiduciary Net Position 34 Notes to Financial Statements 35 Required Supplementary Information Schedule of City's Proportionate Share of Net Pension Liability General Employees Retirement Fund 74 Schedule of City's Proportionate Share of Net Pension Liability Public Employees Police and Fire Retirement Fund 74 Schedule of City Contributions General Employees Retirement Fund 75 Schedule of City Contributions Public Employees Police and Fire Retirement Fund 75 Schedule of Changes in the Net Pension Liability and Related Ratios Fire Relief Association 76 Schedule of City Contributions and Non Employer Contributing Entities Fire Relief Association 77 Notes to Required Supplementary Information 78

3 Table of Contents Supplementary Information Detailed Schedule of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual General Fund 81 Combining Balance Sheet Nonmajor Governmental Funds 84 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances Nonmajor Governmental Funds 88 Statement of Fiduciary Net Position 94 Combining Statement of Changes in Assets and Liabilities All Agency Funds 95 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 97 Report on Legal Compliance 99 Schedule of Findings and Responses on Internal Control and Legal Compliance 100

4 Elected Officials and Administration December 31, 2016 Elected Officials Position Term Expires Pat Mikesh Mayor December 31, 2016 Ryan Leckner Council Member December 31, 2016 Rod Nordberg Council Member December 31, 2016 Erika Randall Council Member December 31, 2018 Paul Utke Council Member December 31, 2018 Administration John McKinney City Administrator Appointed Angela Brumbaugh City Treasurer Appointed Margie Vik City Clerk Appointed 1

5 Independent Auditor's Report Honorable Mayor and Members of the City Council Park Rapids, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the, Minnesota, as of and for the year ended December 31, 2016, and the related notes to financial statements, which collectively comprise the City's basic financial statements as listed in the Table of Contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the City's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 2 BerganKDV, Ltd. bergankdv.com

6 Opinions In our opinion, the financial statements referred in the first paragraph present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the, Minnesota, as of December 31, 2016, and the respective changes in financial position and, where applicable, cash flows thereof and the budgetary comparison for the General Fund and Airport Fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis, which follows this report letter, and Required Supplementary Information as listed in the Table of Contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board (GASB), who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the Required Supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Park Rapid's basic financial statements. The combining and individual nonmajor fund financial statements are presented for purposes of additional analysis and are not a required part of the basic financial statements. 3

7 Other Matters (Continued) Other Information (Continued) The combining and individual nonmajor fund financial statements are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 26, 2017, on our consideration of the City of Park Rapid's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Park Rapid's internal control over financial reporting and compliance. St. Cloud, Minnesota June 26,

8 Management's Discussion and Analysis As management of the (the "City"), we offer readers of the City's financial statements with a narrative overview and analysis of the financial activities of the City for the year ended December 31, FINANCIAL HIGHLIGHTS The assets and deferred outflows of resources of the City exceeded its liabilities and deferred inflows of resources at the close of the most recent year by $40,039,228 (net position). The City's total net position from operations decreased by $1,265,464. As of the close of the current year, the governmental funds reported combined ending fund balances of $8,487,228. At the end of the current year, the unassigned fund balance for the General Fund was $1,843,423, or 60.1%, of the total General Fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS The Management Discussion and Analysis (MD&A) is intended to serve as an introduction to the City's basic financial statements. The City's basic financial statements are comprised of three components: governmental-wide financial statements, fund financial statements and notes to financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-Wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the City's finances, in a manner similar to a private-sector business. The Statement of Net Position presents information on all of the City's assets, deferred outflows of resources, liabilities, and deferred inflows of resources, with the difference between reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities presents information showing how the City's net position changed during the most recent year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this Statement for some items that will only result in cash flows in future fiscal periods (e.g. uncollected taxes and earned but unused vacation leave.) 5

9 Management's Discussion and Analysis OVERVIEW OF THE FINANCIAL STATEMENTS (CONTINUED) Government-Wide Financial Statements (Continued) Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (businesstype activities). The governmental activities of the City include general government, public safety, public works, economic development, parks and recreation, nature and conservation, and airport. The business-type activities of the City include water, sanitary sewer, storm water, and municipal liquor store. The governmental-wide financial statements can be found on pages of this report. Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows, and outflows of spendable resources, as well as on balances of spendable resources available at the end of the year. Such information may be useful in evaluating a City's near-term financial requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statement. By doing so, readers may better understand the long-term impact of the City's near-term financial decisions. Both the governmental fund Balance Sheet and governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains eight individual major governmental funds. Information is presented separately in the governmental fund Balance Sheet and in the governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balances for the General Fund, five debt service funds, one special revenue fund, and one capital project fund, all of which are considered to be major funds. Data from the other governmental funds are combined into a single aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining Statements elsewhere in the report. 6

10 Management's Discussion and Analysis OVERVIEW OF THE FINANCIAL STATEMENTS (CONTINUED) Governmental Funds (Continued) The City adopts an annual appropriated budget for the General Fund and Airport Special Revenue Fund. A budgetary comparison statement has been provided for the General Fund and Airport Special Revenue Fund to demonstrate compliance with these budgets. The basic governmental fund financial statements can be found on pages of this report. Proprietary Funds The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the governmental-wide financial statements. The City uses enterprise funds to account for its sewer, water, storm water, and liquor store. Internal service funds are accounting devices used to accumulate and allocate costs internally among the City' various functions. The City uses an internal service fund to account for the operations of the public works/public safety building. Because these services benefit both governmental and business-type functions, they have been included within government and business-type activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the sanitary sewer, water, storm water, and liquor store operations. All of which are considered to be major funds of the City. The basic proprietary fund financial statements can be found on pages of this report. Fiduciary Funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government wide financial statements because the resources of those funds are not available to support the City's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The basic fiduciary fund financial statements can be found on page 34 of this report. Notes to Financial Statements The notes provided additional information that is essential to fully understand the data provided in the government-wide and fund financial statements. The notes to financial statements can be found on pages of this report. Other Information The combining statements referred to earlier in connection with non-major governmental funds and internal service funds are presented immediately following the required supplementary information on pensions. Combining and individual fund statements and schedules can be found on pages of this report. 7

11 Management's Discussion and Analysis OVERVIEW OF THE FINANCIAL STATEMENTS (CONTINUED) Government-Wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a city's financial position. In the case of the City, assets and deferred outflows of resources exceeded liabilities and deferred inflows of resources by $40,039,228 at the close of the most recent year. By far the largest portion of the City's net position (65.7%) reflects its investment in capital assets (e.g. land, buildings, machinery, and equipment) less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in its capital assets is reported net of related debt, it should be noted the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. City's Net Position Governmental Activities Business - Type Total Current and other assets $ 11,030,381 $ 13,792,744 $ 6,591,588 $ 6,885,723 $ 17,621,969 $ 20,678,467 Capital assets 23,410,064 23,919,807 18,393,481 17,013,433 41,803,545 40,933,240 Total assets $ 34,440,445 $ 37,712,551 $ 24,985,069 $ 23,899,156 $ 59,425,514 $ 61,611,707 Deferred outflows of resources $ 314,793 $ 2,180,875 $ 52,873 $ 226,040 $ 367,666 $ 2,406,915 Long-term liabilities Outstanding $ 13,478,094 $ 18,881,445 $ 2,361,309 $ 2,441,527 $ 15,839,403 $ 21,322,972 Other liabilities 2,092,365 1,930, , ,196 2,399,895 2,176,848 Total liabilities $ 15,570,459 $ 20,812,097 $ 2,668,839 $ 2,687,723 $ 18,239,298 $ 23,499,820 Deferred inflows of resources $ 205,676 $ 408,760 $ 43,514 $ 70,814 $ 249,190 $ 479,574 Net position Net investment in Capital assets $ 16,924,788 $ 16,889,046 $ 16,352,750 $ 15,052,300 $ 27,192,363 $ 26,321,646 Restricted 5,925,705 4,977, ,925,705 4,977,676 Unrestricted (3,871,390) (3,194,153) 5,972,839 6,314,359 8,186,624 8,739,906 Total net position $ 18,979,103 $ 18,672,569 $ 22,325,589 $ 21,366,659 $ 41,304,692 $ 40,039,228 8

12 Management's Discussion and Analysis OVERVIEW OF THE FINANCIAL STATEMENTS (CONTINUED) Governmental Activities Governmental activities decreased the City net position by $306,534. The main difference in the Governmental activities is due to GASB 68 adjustments. Business-type activities decreased by $958,930. The key elements in this decrease pertains to the depreciation expense. The overall decrease in net position is $1,265,464. The key elements of these increases/decreases are as follows: City's Changes in Net Position Governmental Activities Business - Type Total Revenues Program revenues Charges for services $ 617,830 $ 676,700 $ 4,421,592 $ 4,417,490 $ 5,039,422 $ 5,094,190 Operating grants and Contributions 496, ,844-9, , ,489 Capital grants and Contributions 1,709, , ,709, ,077 General revenues Property taxes 2,440,482 2,485, ,440,482 2,485,396 Other taxes 226, , , ,112 Franchise taxes 143, , , ,005 State aid 478, , , ,744 Investment earnings 205, ,862 6,986 5, , ,346 Gain of sale of assets 3, ,300 - Insurance recoveries - - 5,871 3,810 5,871 3,810 Total revenues $ 6,321,970 $ 4,911,740 $ 4,434,449 $ 4,436,429 $ 10,756,419 $ 9,348,169 Expenses General government $ 722,968 $ 828,112 $ - $ - $ 722,968 $ 828,112 Public safety 1,385,967 1,861, ,385,967 1,861,769 Public works 858,961 1,112, ,961 1,112,641 Economic development 209, , , ,131 Park and recreation 252,732 92, ,732 92,021 Nature and conservation 13,577 2, ,577 2,239 Airport 566, , , ,653 Interest on debt 727, , , ,105 Water , , , ,914 Sewer - - 1,370,124 1,316,314 1,370,124 1,316,314 Storm water ,744 28,459 11,744 28,459 Liquor store - - 2,898,901 2,930,275 2,898,901 2,930,275 Total expenses 4,737,579 5,511,671 5,095,453 5,101,962 9,833,032 10,613,633 Excess of revenues over (under) expenses before transfers 1,584,391 (599,931) (661,004) (665,533) 923,387 (1,265,464) Transfers (1,044,585) 293,397 1,044,585 (293,397) - - Change in net position 539,806 (306,534) 383,581 (958,930) 923,387 (1,265,464) Net position - January 1 19,072,915 18,979,103 22,305,641 22,325,589 41,378,556 41,304,692 Change in accounting principle (633,618) - (363,633) - (997,251) - Net position - December 31 $ 18,979,103 $ 18,672,569 $ 22,325,589 $ 21,366,659 $ 41,304,692 $ 40,039,228 9

13 Management's Discussion and Analysis FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS Governmental Funds The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unrestricted fund balance may serve as a useful measure of a government's net resources available for spending at the end of the year. At the end of the current year, the City's governmental funds reported combined ending fund balances of $8,487,228. Approximately 36% of this total amount, $3,101,380, constitutes assigned and unassigned fund balance. The remainder of the fund balance is nonspendable or restricted to indicate that it is not available for new spending because it has already been spent or set aside for specific purposes. The fund balance in the General Fund went up $80,128 from 2015 to At the end of the current year, the fund balance of the General Fund was $2,723,839. The City has contracted with our current Administrator since September The City saves approximately 15% with contracting based on the top pay scale of an Administrator. General Fund Budgetary Highlights The actual ending expenditures for the General Fund were $48,358 over what was originally allocated. Below is a summarization of where each program finished: Budgeted Amount Actual Amount Variance Program General government $ 739,591 $ 764,072 $ 24,481 Public safety 1,343,642 1,357,963 14,321 Public works 614, ,680 20,734 Park and recreation 197, ,966 32,955 Economic development 40,000 41,020 1,020 Nature and conservation 22,713 6,068 (16,645) Capital outlay General government 11,500 3,007 (8,493) Public safety 15,000 31,985 16,985 Public works 37,000 - (37,000) Total $ 3,021,403 $ 3,069,761 $ 48,358 10

14 Management's Discussion and Analysis FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS (CONTINUED) General Fund Budgetary Highlights (Continued) The variances in this year's budget is a combination of things. Property taxes are budgeted at the levy amount. If some property taxes are delinquent it may create a short-fall unless more delinquent taxes are collected than what was budgeted. The City did see an increase in property tax collections for We do budget conservatively for investment income which ended the year over budget. The City received more in rental income as the City did not budget for a contract that was in place for the year. Additionally, the City does not budget for contributions and other sources of revenue due to the fluctuating nature of those sources, resulting in the City receiving additional funds. The City also saw an increase in court fines and fees from the prior year. Many of the departments came in over their budgeted amounts for a variety of reasons. General government was over budget with increased lodging tax expenses and additional legal fees. Public safety was over budget due to additional capital purchases during the year. Parks did go over because of the resurfacing of a tennis court that while it was not budgeted, the expenses were offset somewhat by donations to the City. Nature and conservation was under budget with fewer staff hours in the program than anticipated. Proprietary Funds The City's proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. The unrestricted net position in the respective proprietary funds are: Sewer $1,685,249; Water $2,259,800; Storm Water $426,827 and Liquor $1,762,186. The Water Fund had a decrease of $139,134; the Sewer Fund had a decrease of $848,146, storm water increased by $84,124 and the liquor store had a decrease of $56,226. The Water and Sewer Funds decreased due to depreciation expense and Storm Funds increased due to positive operations during The Liquor Store did see transfers out for real estate acquisition (the old Liquor Store building which was needed with the improvements to the Fire Hall), Deane Park restroom, Architect fees for the improvements for City Hall in 2017, 2016 Ford F250 for the Mechanic, and Police laptops. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets The City's investment in capital assets for its governmental and business-type activities as of December 31, 2016, amounts to $40,933,240 (net of accumulated depreciation). This investment in capital assets includes land, buildings, infrastructure, machinery, and equipment. 11

15 Management's Discussion and Analysis CAPITAL ASSET AND DEBT ADMINISTRATION (CONTINUED) Capital Assets (Continued) Major capital asset events during the current year included the following: For business-type activities, the Sewer Fund did some irrigator upgrades to #4 and #5. The Sewer, Water, and Storm Water funds had completion of the Riverside, and North Main, project. The Liquor Store replaced their camera system. Governmental activities had increases to capital assets for a restroom in Deane Park, message board which was placed in the parks, radios and laptops for the Police. A piece of land was purchased specifically for the fire hall project in order to keep the new building on City Land. Capital Assets Governmental Activities Business-Type Activities Total Land $ 4,730,053 $ 4,741,457 $ 2,757,042 $ 2,757,042 $ 7,487,095 $ 7,498,499 Construction in progress 1,678,298 1,236,603 1,397,384-3,075,682 1,236,603 Buildings 5,117,851 5,300,388 3,408,174 3,408,174 8,526,025 8,708,562 Buildings-internal service 488, , , ,760 Machinery and equipment 5,870,006 5,927,988 34,187,670 35,779,052 40,057,676 41,707,040 Infrastructure 19,302,733 21,079, ,302,733 21,079,661 Total capital assets 37,187,701 38,774,857 41,750,270 41,944,268 78,937,971 80,719,125 Less accumulated (13,777,637) (14,855,050) (23,356,789) (24,930,835) (37,134,426) (39,785,885) Net capital assets $ 23,410,064 $ 23,919,807 $ 18,393,481 $ 17,013,433 $ 41,803,545 $ 40,933,240 Additional information on the City capital assets can be found in Note 5 on pages of this report. LONG-TERM DEBT At the end of the current year, the City had total long-term bonded debt outstanding of $18,516,133; of which $16,555,000 was for general obligation (G.O.) improvement debt which has financed special assessment construction as part of the City's Paving Management Program, as well as $1,143,000 in revenue debt associated with the financing of the RDO Wastewater Treatment Plant. The City receives payments from RDO to pay off this obligation. The bonded debt increased by $3,000,402. In addition to bonded debt, the City also has obligations totaling $174,533 for compensated absences. Of this amount $121,693 is for government activity and $52,840 is for business-type activity. 12

16 Management's Discussion and Analysis LONG-TERM DEBT (CONTINUED) City's Outstanding Debt G.O. Improvement Bonds, G.O. Tax Increment Bonds, Long-Term Notes and Compensated Absences The last rating from Standard and Poor's (S&P) the City received was an AA- on its G.O. debt. Minnesota Statutes limit the amount of G.O. debt a Minnesota city may issue to 2% of total estimated market value. Currently, the City has no debt outstanding that counts towards this debt limit. Additional information on the City long-term debt can be found in Note 7 on pages of this report. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The valuation of building permits within the City increased 56% from 2015 to We have a few larger projects in the works for The City relies heavily on property taxes for funding general operations. In the past property taxes has made up a large portion of the budget with it being 59% in At year end property taxes made up 56% of the General fund budget. Local Government Aid increased $2,942 for 2016 which made up 16% of the budget. When planning for the following year's budget, the City considers the current debt, legislative actions proposed for Local Government Aid (LGA), and the current economy. REQUESTS FOR INFORMATION Governmental Activities Business-Type Activities Total G.O. Improvement $ 13,475,000 $ 16,555,000 $ - $ - $ 13,475,000 $ 16,555,000 G.O. Revenue Bonds - - 1,222,598 1,143,000 1,222,598 1,143,000 Forgivable Grant , , , ,133 Premium 60, , , ,762 Compensated Absences 133, ,693 50,412 52, , ,533 Total $ 13,668,314 $ 16,800,455 $ 2,091,143 $ 2,013,973 $ 15,759,457 $ 18,814,428 This financial report is designed to provide a general overview of the City finances for all those with an interest in the City's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the City Administrator, 212 West Second Street, Park Rapids, Minnesota

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18 BASIC FINANCIAL STATEMENTS 15

19 Statement of Net Position December 31, 2016 Governmental Activities Business-Type Activities Total Assets Cash and investments (including cash equivalents) $ 4,738,696 $ 5,921,106 $ 10,659,802 Cash with fiscal agent 4,004,167-4,004,167 Receivables Property tax receivable 84,269-84,269 Accounts receivable 149, , ,263 Interest receivable 4,987-4,987 Due from other governments 419,559 9, ,662 Internal balances (180,297) 180,297 - Special assessments receivable Delinquent 123,765 3, ,125 Deferred 3,554,318 11,472 3,565,790 Inventories - 456, ,273 Prepaid expenses 7,741-7,741 Land held for resale 55,400-55,400 Notes receivable Due within one year 439, ,686 Due in more than one year 39,929-39,929 Net pension asset - Fire Relief Association 351, ,373 Capital assets not being depreciated Land 4,741,457 2,757,042 7,498,499 Construction in progress 1,236,603-1,236,603 Capital assets being depreciated, net Infrastructure 14,442,656-14,442,656 Buildings 2,449,941 2,679,268 5,129,209 Machinery, equipment, and distribution systems 1,049,150 11,577,123 12,626,273 Total assets 37,712,551 23,899,156 61,611,707 Deferred Outflows of Resources Deferred outflows of resources related to pensions 2,180, ,040 2,406,915 Total assets and deferred outflows of resources $ 39,893,426 $ 24,125,196 $ 64,018,622 Liabilities Accounts and contracts payable $ 764,978 $ 100,712 $ 865,690 Due to other governments 47,724 2,208 49,932 Salaries and benefits payable 46,287 14,980 61,267 Interest payable 37,563 7,904 45,467 Unearned revenue - 4,728 4,728 Bond principle payable (net of premium) Payable within one year 955,000 81,000 1,036,000 Payable after one year 15,723,762 1,880,133 17,603,895 Compensated absences payable Payable within one year 79,100 34, ,764 Payable after one year 42,593 18,176 60,769 Net pension liability 3,115, ,218 3,658,308 Total liabilities 20,812,097 2,687,723 23,499,820 Deferred Inflows of Resources Deferred inflows of resources related to pensions 408,760 70, ,574 Net Position Net investment in capital assets 16,889,046 15,052,300 26,321,646 Restricted for Debt service 4,527,121-4,527,121 Tax increment 368, ,102 Park dedication 7,825-7,825 Other purposes 74,628-74,628 Unrestricted (3,194,153) 6,314,359 8,739,906 Total net position 18,672,569 21,366,659 40,039,228 Total liabilities, deferred inflows of resources, and net position $ 39,893,426 $ 24,125,196 $ 64,018,622 See notes to financial statements. 16

20 17 Statement of Activities Year Ended December 31, 2016 Net (Expense) Revenue Program Revenues and Changes in Net Position Functions/Programs Expenses Charges for Services Operating Grants and Contributions Capital Grants and Contributions Governmental Activities Business-Type Activities Total Governmental activities General government $ 828,112 $ 172,428 $ - $ - $ (655,684) $ - $ (655,684) Public safety 1,861, , ,781 18,000 (1,320,284) - (1,320,284) Public works 1,112,641 1,685 9, ,307 (840,649) - (840,649) Park and recreation 289, ,123 - (255,058) - (255,058) Economic development 92,021-4,296 - (87,725) - (87,725) Nature and conservation 2, (2,239) - (2,239) Airport 578, ,933 68, ,770 (180,306) - (180,306) Interest on long-term debt 747, (747,105) - (747,105) Total governmental activities 5,511, , , ,077 (4,089,050) - (4,089,050) Business-type activities Water 826, ,366 7, (137,579) (137,579) Sewer 1,316, , (864,846) (864,846) Storm water 28, , ,447 88,447 Municipal liquor 2,930,275 3,168,243 1, , ,151 Total business-type activities 5,101,962 4,417,490 9, (674,827) (674,827) Total governmental and business-type activities $ 10,613,633 $ 5,094,190 $ 328,489 $ 427,077 (4,089,050) (674,827) (4,763,877) General revenues Property taxes 2,485,396-2,485,396 Franchise fees 145, ,005 Lodging tax 80,269-80,269 Tax increments 169, ,843 State aids 489, ,744 Unrestricted investment earnings 118,862 5, ,346 Insurance recoveries - 3,810 3,810 Transfers 293,397 (293,397) - Total general revenues, transfers and special item 3,782,516 (284,103) 3,498,413 Change in net position (306,534) (958,930) (1,265,464) Net position - beginning 18,979,103 22,325,589 41,304,692 Net position - ending $ 18,672,569 $ 21,366,659 $ 40,039,228 See notes to financial statements.

21 Balance Sheet - Governmental Funds December 31, 2016 Special Revenue Capital Project General Fund (100) Airport (208) Fire Capital Equipment (492) Assets Cash and investments $ 2,335,005 $ - $ 505,646 Cash with fiscal agent Taxes receivable - delinquent 60, Special assessments receivable Delinquent Deferred Accounts receivable 56,617 88,892 - Interest receivable 4, Due from other funds 446, Due from other governments 131, ,509 - Land held for resale Notes receivable Prepaid Expenses 7, Liabilities Total assets $ 3,043,242 $ 339,401 $ 505,646 Accounts and contracts payable $ 167,631 $ 56,577 $ 323,127 Salaries and benefits payable 44,027 2,260 - Due to other funds - 255,317 - Due to other governments 46, Total liabilities 258, , ,127 Deferred Inflows of Resources Unavailable revenue - notes receivable Unavailable revenue - property taxes 60, Unavailable revenue - special assessments Total deferred inflows of resources 60, Fund Balances Nonspendable 7, Restricted Assigned 872,675 24, ,519 Unassigned 1,843, Total fund balances 2,723,839 24, ,519 Total liabilities, deferred inflows of resources, and fund balances $ 3,043,242 $ 339,401 $ 505,646 See notes to financial statements. 18

22 2010B G.O. Bond (321) 2015A G.O. Improvement Refunding Bonds (324) Debt Service 2016A G.O. Bond (325) 2012 G.O. Crossover Refunding Bond (323) Other Governmental Funds Total Governmental Funds $ 126,115 $ 303,009 $ - $ 265,669 $ 1,166,838 $ 4,702, ,004, ,004,167 5,710 1,690-5,591 10,475 84,269 2,132 11,176-82,021 28, , ,259 1,277, , ,862 3,554, , , , ,352 2,243 1,518 15,131 6,666 11, , ,400 55, , , ,741 $ 1,001,459 $ 1,595,341 $ 4,019,298 $ 1,253,196 $ 2,274,023 $ 14,031,606 $ - $ - $ - $ - $ 214,713 $ 762, , , , , , , ,859 1,302, , ,615 5,710 1,690-5,591 10,475 84, ,391 1,289, , ,298 3,678, ,101 1,290, ,861 1,036,388 4,241, , , ,527 4,000, , ,478 5,378, ,788 1,481, (223,490) 1,619, , ,527 4,000, , ,776 8,487,228 $ 1,001,459 $ 1,595,341 $ 4,019,298 $ 1,253,196 $ 2,274,023 $ 14,031,606 19

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24 Reconciliation of the Balance Sheet to the Statement of Net Position - Governmental Funds December 31, 2016 Total fund balances - governmental funds $ 8,487,228 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not current financial resources and, therefore, are not reported as net position in governmental funds. Cost of capital assets 38,286,097 Less accumulated depreciation (14,693,399) Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Long-term liabilities at year-end consist of: Bond principal payable (16,555,000) Unamortized premium (123,762) Compensated absences payable (121,693) Net pension liability (3,115,090) Net pension asset 351,373 Delinquent receivables will be collected in subsequent years, but are not available soon enough to pay for the current period's expenditures and, therefore, are deferred in the funds. Property taxes 84,269 Special assessments 123,765 Deferred outflows of resources and deferred inflows of resources are created as a result of various differences related to pensions that are not recognized in the governmental funds. Deferred inflows of resources related to pensions (408,760) Deferred outflows of resources related to pensions 2,180,875 Revenues in the Statement of Activities that do not provide current financial resources are not reported as revenues in the funds. Deferred special assessments 3,554,318 Notes receivable 479,615 Governmental funds do not report a liability for accrued interest due and payable. (37,563) An Internal Service Fund is used by management to charge the costs of the public works building to individual funds. The assets and liabilities of the Internal Service Funds are included in governmental activities in the Statement of Net Position. 180,296 Total net position - governmental activities $ 18,672,569 See notes to financial statements. 21

25 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Year Ended December 31, 2016 Special Revenue Capital Project General Fund (100) Airport (208) Fire Capital Equipment (492) Revenues Property taxes $ 1,809,785 $ - $ - Tax increments Miscellaneous taxes 254, Special assessments Licenses and permits 89, Intergovernmental 699, ,414 - Charges for services 219, ,449 58,193 Fines and forfeitures 44, Miscellaneous Investment income 48,786 (294) 158 Contributions and donations 37,498-18,000 Other 42,751 17,409 - Total revenues 3,246, ,978 76,351 Expenditures Current General government 764, Public safety 1,357,963-12,838 Public works 635, Park and recreation 229, Economic development 41, Nature and conservation 6, Airport - 231,522 - Debt service Principal Interest and other charges ,772 Capital outlay General government 3, Public safety 31, ,978 Public works Park and recreation Airport - 185,358 - Total expenditures 3,069, , ,588 Excess of revenues over (under) expenditures 176,883 (18,902) (858,237) Other Financing Sources (Uses) Issuance of bonds ,000 Bond premium ,277 Transfers in 13,230-31,000 Transfers out (109,985) - - Total other financing sources (uses) (96,755) - 971,277 Net change in fund balances 80,128 (18,902) 113,040 Fund Balances Beginning of year 2,643,711 43,367 69,479 End of year $ 2,723,839 $ 24,465 $ 182,519 See notes to financial statements. 22

26 2010B G.O. Bond (321) 2015A G.O. Improvement Refunding Bonds (324) Debt Service 2008 G.O. Bond (316) 2016A G.O. Bond (325) 2012 G.O. Crossover Refunding Bond (323) Other Governmental Funds Total Governmental Funds $ 168,034 $ 49,956 $ 53,506 $ - $ 148,758 $ 290,942 $ 2,520, , , , , ,802 44, , , , , , , , , , , ,593 88, , ,847 98,419 47, , ,881 5,497, , ,359 1,374, , , , , ,761-26,701 76, , , , , , , ,882 1,948, , ,007 31, ,138 73, , , , , , , , , ,463 73, , , , , , ,085 1,437,968 7,647,499 (17,022) 35,840 (668,198) (126,096) (144,183) (530,087) (2,150,002) ,075, ,995, , ,782 20, , , , ,649 1,807,848 - (655,000) (114,862) - - (545,512) (1,425,359) 20,000 (540,138) 540,138 4,126, , ,137 5,449,271 2,978 (504,298) (128,060) 4,000, ,924 (376,950) 3,299, , , , ,411 1,227,726 5,187,959 $ 128,358 $ 304,527 $ - $ 4,000,409 $ 272,335 $ 850,776 $ 8,487,228 23

27 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities - Governmental Funds Year Ended December 31, 2016 Net change in fund balances - governmental funds Amounts reported for governmental activities in the Statement of Activities are different because: $ 3,299,269 Capital outlays are reported in governmental funds as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over the estimated useful lives as depreciation expense. Capital outlays 1,659,920 Depreciation expense (1,061,121) Assets contributed to proprietary funds (72,764) Compensated absences are recognized as paid in the governmental funds but recognized as the expense is incurred in the Statement of Activities. 11,445 Principal payments on long-term debt are recognized as expenditures in the governmental funds but as an increase in the net position in the Statement of Activities. 1,915,000 Governmental funds report the effects of bond premiums and discounts when debt is first issued, whereas these amounts are deferred and amortized in the Statement of Activities. (63,586) Interest on long-term debt in the Statement of Activities differs from the amount reported in the governmental funds because interest is recognized as an expenditure in the funds when it is due and thus requires use of current financial resources. In the Statement of Activities, however, interest expense is recognized as the interest accrues, regardless of when it is due. (4,511) Proceeds from long-term debt are recognized as another financing source in the governmental funds but as a decrease in net position in the Statement of Activities. Bonds payable (4,995,000) Revenues in the Statement of Activities that do not provide current financial resources are not reported as revenues in the funds. Special assessments deferred (498,972) Special assessments delinquent (36,421) Notes receivable (15,047) Governmental funds recognize pension contributions as expenditures at the time of payment whereas the Statement of Activities factors in items related to pensions on a full accrual perspective. Pension expense (409,613) Delinquent property taxes receivable will be collected in subsequent years, but are not available soon enough to pay for the current period's expenditures and, therefore, are deferred in the funds. (35,585) Internal Service Fund activity allocated to governmental funds 452 Change in net position- governmental activities $ (306,534) See notes to financial statements. 24

28 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual - General Fund Year Ended December 31, 2016 Budgeted Amounts Original and Final Actual Amounts Variance with Final Budget - Over (Under) Revenues Property taxes $ 1,792,729 $ 1,809,785 $ 17,056 Miscellaneous taxes 228, ,014 26,014 Licenses and permits 74,200 89,894 15,694 Intergovernmental 708, ,150 (9,124) Charges for services 181, ,998 38,798 Fines and forfeitures 28,000 44,768 16,768 Miscellaneous revenues Investment income 40,000 48,786 8,786 Contributions and other - 80,249 80,249 Total revenues 3,052,403 3,246, ,241 Expenditures Current General government 739, ,072 24,481 Public safety 1,343,642 1,357,963 14,321 Public works 614, ,680 20,734 Park and recreation 197, ,966 32,955 Economic development 40,000 41,020 1,020 Nature and conservation 22,713 6,068 (16,645) Capital outlay General government 11,500 3,007 (8,493) Public safety 15,000 31,985 16,985 Public works 37,000 - (37,000) Total expenditures 3,021,403 3,069,761 48,358 Excess of revenues over expenditures 31, , ,883 Other Financing Sources (Uses) Insurance refund Transfers in - 13,230 13,230 Transfers out (31,000) (109,985) (78,985) Total other financing sources (uses) (31,000) (96,755) (65,755) Net change in fund balances $ - 80,128 $ 80,128 Fund Balances Beginning of year 2,643,711 End of year $ 2,723,839 See notes to financial statements. 25

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30 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual - Airport Special Revenue Fund Year Ended December 31, 2016 Budgeted Amounts Original and Final Actual Amounts Revenues Intergovernmental $ 1,557,050 $ 216,414 $ (1,340,636) Charges for services 201, ,449 (36,761) Miscellaneous revenues Investment gain (loss) (500) (294) 206 Contributions and other - 17,409 17,409 Total revenues 1,757, ,978 (1,359,782) Expenditures Current Airport 259, ,522 (28,057) Capital outlay Airport 1,587, ,358 (1,401,642) Total expenditures 1,846, ,880 (1,429,699) Excess of revenues over (under) expenditures (88,819) (18,902) 69,917 Other Financing Sources Transfers in 88,819 - (88,819) Net change in fund balances $ - (18,902) $ (18,902) Fund Balances Beginning of year 43,367 End of year $ 24,465 Variance with Final Budget - Over (Under) See notes to financial statements. 27

31 Statement of Net Position - Proprietary Funds December 31, 2016 Water (601) Sewer (602) Liquor (609) Assets Current assets Cash and investments $ 2,199,736 $ 1,685,329 $ 1,632,803 Special assessments receivable Delinquent 1,680 1,680 - Deferred 5,736 5,736 - Accounts receivable 158,221 98,394 18,726 Due from other governments 9, Inventories ,273 Total current assets 2,374,443 1,791,172 2,107,802 Noncurrent assets Capital assets Land 17,708 2,651,617 87,717 Buildings 2,697, ,486 Machinery, equipment, and distribution systems 11,409,519 23,480, ,771 Total capital assets 14,124,915 26,132,287 1,086,974 Less accumulated depreciation (6,616,136) (17,614,148) (639,217) Net capital assets 7,508,779 8,518, ,757 Total noncurrent assets 7,508,779 8,518, ,757 Total assets 9,883,222 10,309,311 2,555,559 Deferred Outflows of Resources Deferred outflows of resources related to city pensions 46,896 50, ,470 Total assets and deferred outflows of resources $ 9,930,118 $ 10,359,772 $ 2,682,029 Liabilities Current liabilities Accounts and contracts payable $ 8,471 $ 6,734 $ 84,124 Salaries and benefits payable 1,827 2,355 10,798 Interest payable 7, Due to other governments ,338 Unearned revenue - gift certificates - - 4,728 Compensated absences - due within one year 10,122 6,319 18,223 Bonds and notes payable - due within one year 81, Total current liabilities 109,696 15, ,211 Noncurrent liabilities Compensated absences 15,572 9,722 27,546 Bonds payable 1,961, Net pension liability 112, , ,931 Less amount due within one year (91,122) (6,319) (18,223) Total noncurrent liabilities 1,998, , ,254 Total liabilities 2,107, , ,465 Deferred Inflows of Resources Deferred inflows of resources related to pensions 14,692 15,808 39,621 Net Position Net investment in capital assets 5,547,646 8,518, ,757 Unrestricted 2,259,800 1,685,249 1,762,186 Total net position 7,807,446 10,203,388 2,209,943 Total liabilities, deferred inflows of resources, and net position $ 9,930,118 $ 10,359,772 $ 2,682,029 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds Total business-type activities net position See notes to financial statements. 28

32 Storm Water (651) Total Internal Service Public Works/Safety Building (703) $ 403,238 $ 5,921,106 $ 36,414-3, ,472-28, , , , ,009 6,705,426 36,414-2,757, ,408, , ,092 35,779, ,092 41,944, ,760 (61,334) (24,930,835) (161,651) 538,758 17,013, , ,758 17,013, , ,767 23,718, ,523 2, ,040 - $ 972,980 $ 23,944,899 $ 363,523 $ 1,383 $ 100,712 $ 2,930-14, , , , , ,000-1, ,196 2,930-52, ,961,133-5, , (115,664) - 5,319 2,441,527-6,702 2,687,723 2, , ,758 15,052, , ,827 6,134,062 33, ,585 21,186, ,593 $ 972,980 $ 363, ,297 $ 21,366,659 29

33 Statement of Revenues, Expenses, and Changes in Fund Net Position - Proprietary Funds Year Ended December 31, 2016 Water (601) Sewer (602) Liquor (609) Sales and cost of sales Sales $ - $ - $ 3,168,028 Cost of sales - - 2,405,513 Gross profit ,515 Operating revenue Charges for services 642, ,045 - Operating expenses Wages and salaries 136, , ,564 Materials and supplies 39,078 12,969 9,899 Repairs and maintenance 17,161 25,508 1,883 Professional services 20,757 7,915 62,460 Insurance 19,498 12,281 16,428 Utilities 48,265 54,466 19,207 Depreciation 493,710 1,016,254 39,965 Travel Other expense 9,269 23,256 3,618 Rent 27,066 26, Total operating expenses 811,679 1,324, ,762 Operating income (loss) (169,626) (925,336) 237,753 Nonoperating revenues (expenses) Rent 34,699 50,780 - Investment income 2,185 1,657 1,226 Operating grants and contributions 7, ,183 Interest expense (23,826) (103) - Other income 4,614 1, Total nonoperating revenues (expenses) 25,641 53,977 2,624 Income (loss) before capital contributions, insurance refunds and transfers (143,985) (871,359) 240,377 Capital contributions 4,851 19,403 - Insurance refunds - 3,810 - Transfers out - - (296,603) Change in net position (139,134) (848,146) (56,226) Net position Beginning of year 7,946,580 11,051,534 2,266,169 End of year $ 7,807,446 $ 10,203,388 $ 2,209,943 Amounts reported for business-type activities in the statement of activities are different because: Adjustment to reflect the consolidation of internal Service fund activities related to enterprise funds Transfers in of capital assets from governmental activities Governmental activities contribution revenue reported above Change in net position - business-type activities See notes to financial statements. 30

34 Storm Water (651) Total Internal Service Public Works/Safety Building (703) $ - $ 3,168,028 $ - - 2,405, , ,885 1,157, ,077 (1,848) 650, , ,271 48,823 20, ,129 7,755-48,207 1, ,938 19,468 24,117 1,574,046 16, ,143 1,892-54,450 16,092 28,459 2,689,281 83,556 88,426 (768,783) 33,521-85, , , (23,929) - - 6, , ,844 (686,123) 33,560 48,510 72, ,810 - (53,230) (349,833) (32,656) 84,124 (959,382) , ,689 $ 965,585 $ 360, ,764 (72,764) $ (958,930) 31

35 Statement of Cash Flows - Proprietary Funds Year Ended December 31, 2016 Water (601) Sewer (602) Liquor (609) Cash Flows - Operating Activities Receipts from customers and users $ 654,338 $ 417,630 $ 3,162,993 Payments to suppliers (198,114) (193,253) (2,561,880) Payments to employees (130,513) (138,004) (360,038) Net cash flows - operating activities 325,711 86, ,075 Cash Flows - Noncapital Financing Activities Other income 50,540 55, Transfer to other funds - - (296,603) Net cash flows - noncapital financing activities 50,540 55,374 (296,388) Cash Flows - Capital and Related Financing Activities Principal paid on debt (79,598) - - Interest paid on debt (24,429) (103) - Acquisition of capital assets - (102,532) (18,493) Net cash flows - capital and related financing activities (104,027) (102,635) (18,493) Cash Flows - Investing Activities Interest and dividends received 2,185 1,657 1,226 Net change in cash and cash equivalents 274,409 40,769 (72,580) Cash and Cash Equivalents January 1 1,925,327 1,644,560 1,705,383 December 31 $ 2,199,736 $ 1,685,329 $ 1,632,803 Reconciliation of Operating Income (Loss) to Net Cash Flows - Operating Activities Operating income (loss) $ (169,626) $ (925,336) $ 237,753 Adjustments to reconcile operating income (loss) to net cash flows - operating activities Depreciation expense 493,710 1,016,254 39,965 Accounts receivable 12,793 15,855 (5,599) Due from other governments (508) 2,730 - Net pension liability expense 7,367 6,427 6,629 Inventory - - (23,834) Accounts payable (16,880) (30,446) 6,379 Due to other governmental units (140) 234 (24,679) Unearned revenue - gift certificates Salaries payable (1,395) (176) 2,690 Compensated absences payable ,207 Total adjustments 495,337 1,011,709 3,322 Net cash flows - operating activities $ 325,711 $ 86,373 $ 241,075 Noncash Capital Activities Capital contributions $ 4,851 $ 19,403 $ - See notes to financial statements. 32

36 Storm Water (651) Total Internal Service Works/Safety Building (703) $ 136,546 $ 4,371,507 $ 117,077 (6,371) (2,959,618) (105,206) (1,640) (630,195) - 128, ,694 11, ,129 - (53,230) (349,833) (32,656) (53,230) (243,704) (32,656) - (79,598) - - (24,532) - (209) (121,234) - (209) (225,364) , , ,091 (20,746) 327,745 5,603,015 57,160 $ 403,238 $ 5,921,106 $ 36,414 $ 88,426 $ (768,783) $ 33,521 24,117 1,574,046 16,292 19,661 42, ,222 - (3,488) 16, (23,834) - (181) (41,128) (37,852) - (24,585) (90) , ,428-40,109 1,550,477 (21,650) $ 128,535 $ 781,694 $ 11,871 $ 48,510 $ 72,764 $ - 33

37 Statement of Fiduciary Net Position December 31, 2016 Agency Funds Assets Current Cash and investments $ 239,167 Other receivables 736 Total assets $ 239,903 Liabilities Accounts payable $ 239,903 See notes to financial statements. 34

38 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The is a statutory city governed by an elected mayor and four council members. The accompanying financial statements present the government entities for which the government is considered to be financially accountable. The financial statements present the City and its component units. The City includes all funds, account groups, organizations, institutions, agencies, departments, and offices that are not legally separate from such. Component units are legally separate organizations for which the elected officials of the City are financially accountable and are included within the basic financial statements of the City because of the significance of their operational or financial relationships with the City. The City is considered financially accountable for a component unit if it appoints a voting majority of the organization's governing body and it is able to impose its will on the organization by significantly influencing the programs, projects, activities, or level of services performed or provided by the organization or there is a potential for the organization to provide specific financial benefits to or impose specific financial burdens on, the City. As a result of applying the component unit definition criteria above, certain organizations have been defined and are presented in this report as follows: Blended Component Unit Reported as if they were part of the City. Related Organization The relationship of the City with the entity is disclosed. For each of the categories above, the specific entities are identified as follows: 1. Blended Component Unit The Park Rapids Economic Development Authority (EDA) is a legal entity separate from the City. Although legally separate, the Park Rapids EDA is reported as if it were part of the primary government because it provides services exclusively for the City. Separate financial statements are not prepared for the Park Rapids EDA. 2. Related Organization Park Rapids Volunteer Fire Relief Association The Park Rapids Volunteer Fire Relief Association (the "Association") is organized as a nonprofit organization, legally separate from the City, by its members to provide pension and other benefits to such members in accordance with Minnesota Statutes. Its Board of Trustees is appointed by the members of the Association and not by the City Council. All funding is conducted in accordance with Minnesota Statutes, whereby state aid flows to the Association, tax levies are determined by the Association and are only reviewed by the City and the Association pays benefits directly to its members. Because the Association is fiscally independent of the City, the financial statements of the Association have not been included within the City's reporting entity. 35

39 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. Government-Wide and Fund Financial Statements The government-wide financial statements (i.e., the Statement of Net Position and the Statement of Activities) report information on all of the nonfiduciary activities of the City. The fiduciary funds are only reported in the Statement of Fiduciary Net Position at the fund financial statement level. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment is offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Interest on general long-term debt is considered an indirect expense and is reported separately in the Statement of Activities. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Internally dedicated revenues are reported as general revenues rather than program revenues. Separate financial statements are provided for governmental funds and proprietary funds. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. Agency Funds are presented in the fiduciary fund financial statements. Since, by definition, these assets are being held for the benefit of a third party (other local governments, private parties, etc.) and cannot be used to address activities or obligations of the City, these funds are not incorporated into the government-wide statements. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within 60 days of the end of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. 36

40 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Continued) Property taxes, franchise taxes, licenses, and interest associated with the current period are all considered to be susceptible to accrual and so have been recognized as revenues of the current period. Only the portion of special assessments receivable due within the current period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when cash is received by the City. Description of Funds: Major Governmental Funds: General Fund This fund is the City's primary operating fund. It accounts for all financial resources of the general City, except those required to be accounted for in another fund. Airport Special Revenue Fund This fund accounts for activity of the City's airport. Sources of revenue for the fund are grants and charges for services. Fire Capital Equipment Capital Project Fund This fund accounts for the resources accumulated for and costs associated with the City s fire department capital equipment purchases. 2010B G.O. Bond Debt Service Fund This fund accounts for the resources accumulated and payments made for principal and interest on this bond issue. 2015A G.O. Improvement Refunding Bonds Debt Service Fund This fund accounts for the resources accumulated and payments made for principal and interest on this bond issue G.O. Bond Debt Service Fund This fund accounts for the resources accumulated and payments made for principal and interest on this bond issue. 2016A G.O. Bond Debt Service Fund This Fund accounts for the resources accumulated and payments made for principal and interest on this bond issue G.O. Crossover Refunding Bond Debt Service Fund This fund accounts for the resources accumulated and payments made for principal and interest on this bond issue. Proprietary Funds: Water Fund This fund accounts for the operations of the City's water utility. Sewer Fund This fund accounts for the operations of the City's sewer utility. Liquor Fund This fund accounts for the operations of the City's municipal liquor store. Storm Water Fund This fund accounts for the operations of the City's storm sewer utility. 37

41 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Continued) Description of Funds: (Continued) Internal Service Fund: Public Works/Public Safety Building This fund accounts for the activities related to the use of the building. Fiduciary Funds: Stewardship Fund This fund accounts for grant dollars and donations related to Northwest Minnesota Foundation Program held by the City in a strictly custodial capacity. Community Center Fund This fund accounts for the activity related to the community center operations held by the City in a strictly custodial capacity. Library Fund This fund accounts for the activities related to the operations of the library held by the City in a strictly custodial capacity. Escrow Fund This fund accounts for the activities related to the Tax Increment District No. 9 held by the City strictly in a custodial capacity. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges between the City's sanitary sewer function and various other functions of the City. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the Water, Sewer, Liquor, and Storm Water Enterprise Funds are charges to customers for sales and services. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 38

42 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity 1. Deposits and Investments Cash and investments include balances from all funds that are combined and invested to the extent available in various securities as authorized by state law. Earnings from the pooled investments are allocated to the individual funds based on the average of month-end cash and investment balances. The City's cash and cash equivalents are considered to be cash on hand, demand deposits and shortterm investments with original maturities of three months or less from the date of acquisition. Minnesota Statutes authorizes the City to invest in obligations of the U.S. Treasury, agencies and instrumentalities, shares of investment companies whose only investments are in the aforementioned securities, obligations of the State of Minnesota or its municipalities, bankers' acceptances, future contracts, repurchase and reverse repurchase agreements, and commercial paper of the highest quality with a maturity of no longer than 270 days and in the Minnesota Municipal Investment Pool. Certain investments for the City are reported at fair value as disclosed in Note 3. The City categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The Hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. 2. Receivables and Payables All property tax receivables are shown at a gross amount since both are assessable to the property taxes and are collectible upon the sale of the property. The City levies its property tax for the subsequent year during the month of December. December 28 is the last day the City can certify a tax levy to the County Auditor for collection the following year. Such taxes become a lien on January 1 and are recorded as receivables by the City at that date. The property tax is recorded as revenue when it becomes measurable and available. Hubbard County is the collecting agency for the levy and remits the collections to the City three times a year. The tax levy notice is mailed in March with the first half of the payment due on May 15 and the second half due on October 15. Taxes not collected as of December 31 each year are shown as delinquent taxes receivable. The County Auditor prepares the tax list for all taxable property in the City, applying the applicable tax rate to the tax capacity of individual properties, to arrive at the actual tax for each property. The County Auditor also collects all special assessments, except for certain prepayments paid directly to the City. The County Auditor submits the list of taxes and special assessments to be collected on each parcel of property to the County Treasurer in January of each year. 39

43 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity (Continued) 3. Notes Receivable A note receivable at December 31, 2016, is due from Echopoint Design & Development, LLC to provide bridge financing. A note receivable at December 31, 2016, is due from KFI Black Swan to provide gap financing for the purchase and improvements of a new manufacturing site for Black Swan Cooperage. Two notes receivable at December 31, 2016, are due from Armory Square Management Corporation to provide interim financing for improvements to the National Guard Armory Auditorium to allow for public use of the facility. Various notes receivable at December 31, 2016, are due from assorted business in town through the Small Cities Grant program. 4. Inventory Inventory is valued at cost using the first in, first out (FIFO) method. Inventories of governmental funds are recorded as expenditures when purchased rather than when consumed. 5. Capital Assets Capital assets, which include property, plant, equipment and infrastructure assets (e.g., roads, sidewalks, and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets are defined by the City as assets with an estimated useful life greater than one year and with an initial individual cost as listed below. Land $ 12,500 Land improvements 12,500 Infrastructure 100,000 Buildings 25,000 Building improvements 25,000 Vehicles 2,500 Other equipment 2,500 Intangibles 5,000 Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at acquisition value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. 40

44 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity (Continued) 5. Capital Assets (Continued) Property, plant, and equipment of the City are depreciated using the straight-line method over the following estimated useful lives: Assets Years Land improvements Infrastructure Buildings Vehicles 5-15 Other equipment 5-20 Intangibles Varies 6. Vacation and Sick Leave Full-time City employees accumulate sick leave at the rate of one day for each month of employment. Upon termination or retirement, an employee with a minimum of ten years of service can collect half of all unused sick leave. Employees are granted vacation based on years of service. The City compensates employees who resign, retire, or are terminated for all unused vacation days. The liability for accumulated vacation and sick pay at December 31, 2016 is recorded in the Statement of Net Position. 7. Long-Term Obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type Statement of Net Position. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 41

45 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity (Continued) 8. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until that time. The City has one item that qualifies for reporting in this category. The City presents deferred outflows of resources on the Statement of Net Position for deferred outflows of resources related to pensions for various estimate differences that will be amortized and recognized over future years. In addition to liabilities, the statement of financial position and fund financial statements will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The City presents deferred inflows of resources on the Governmental Balance Sheet as unavailable revenue. The governmental funds report unavailable revenues from three sources: notes receivable, property taxes, and special assessments. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. The City presents deferred inflows of resources on the Statement of Net Position for deferred inflows of resources related to pensions for various estimate differences that will be amortized and recognized over future years. 9. Pensions For purposes of measuring the net pension liability, deferred outflows/inflows of resources, and pension expense, information about the fiduciary net position of the Public Employees Retirement Association (PERA) and the relief association and additions to/deductions from PERA's and the relief association's fiduciary net position have been determined on the same basis as they are reported by PERA and the relief association except that PERA's fiscal year end is June 30. For this purpose, plan contributions are recognized as of employer payroll paid dates and benefit payments and refunds are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. 42

46 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity (Continued) 10. Fund Equity a. Classification In the fund financial statements, governmental funds report fund classifications that comprise a hierarchy based primarily on the extent to which the City is bound to honor constraints on the specific purpose for which amounts in those funds can be spent. Nonspendable Fund Balance These are amounts that cannot be spent because they are not in spendable form or is legally or contractually required to be maintained intact. Restricted Fund Balance These are amounts that are restricted to specific purposes either by a) constraints placed on the use of resources by creditors, grantors, contributors or laws or regulations of other governments or b) imposed by law through enabling legislation. Committed Fund Balance These are amounts that can only be used for specific purposes pursuant to constraints imposed by the City Council (highest level of decision making authority) through resolution. Assigned Fund Balance These are amounts that are constrained by the City's intent to be used for specific purposes but are neither restricted nor committed. Assignments are made by the City's Administrator or Treasurer based on the City Council's direction. Unassigned Fund Balance These are residual amounts in the General Fund not reported in any other classification. The General Fund is the only fund that can report a positive unassigned fund balance. Other funds would report a negative unassigned fund balance should the total of nonspendable, restricted and committed fund balances exceed the total net resources of that fund. b. Minimum Fund Balance The City will strive to maintain a minimum unassigned General Fund balance of six months of operating expenditures. When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. When committed, assigned, or unassigned resources are available for use, it is the City's policy to first use committed resources, then assigned and then use unassigned resources as they are needed. 43

47 Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Equity (Continued) 11. Net Position Net Position represents the difference between assets and deferred outflows of resources and liabilities and deferred inflows of resources in the government-wide financial statements. Net investment in capital assets, consists of capital assets, net of accumulated depreciation, reduced by the outstanding balance of any long-term debt used to build or acquire the capital assets. A reclassification of $5,619,700 was made between this net position class and unrestricted net position in the total column of the Statement of Net Position to recognize the portion of debt attributable to capital assets donated from governmental activities to business-type activities. Net position is reported as restricted in the government-wide financial statement when there are limitations on use through external restrictions imposed by creditors, grantors or laws, or regulations of other governments. 12. Use of Estimates The preparation of basic financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates. E. Budgetary Information 1. On September 15 of each year, City staff submits to the City Council, a proposed operating budget for the year commencing the following January 1. The operating budget includes proposed expenditures and the means of financing them for the upcoming year. 2. Public hearings are conducted to obtain taxpayer comments. 3. The budget is legally enacted through passage of a resolution after obtaining taxpayer comments. 4. Budgets for the General Fund and Airport Special Revenue Fund are adopted on a basis consistent with accounting principles generally accepted in the United States of America. 5. Expenditures may not legally exceed budgeted appropriations at the department level. No fund's budget can be increased without City Council approval. The City Council may authorize transfer of budgeted amounts between departments within any fund. Management may amend budgets within a department level, so long as the total department budget is not changed. 6. Annual appropriated budgets are adopted during the year for the General Fund. Annual appropriated budgets are not adopted for other Special Revenue Funds. Annual appropriated budgets are not adopted for Debt Service Funds because effective budgetary control is alternatively achieved through bond indenture provisions. Budgetary control for Capital Projects Funds is accomplished through the use of project controls and formal appropriated budgets are not adopted. 7. Budgeted amounts are as originally adopted or as amended by the City Council. Individual amendments were not material in relation to the original amounts budgeted. Budgeted expenditure appropriations lapse at year-end. 44

48 Notes to Financial Statements NOTE 2 STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY A. Fund Balance Deficits The following funds had deficit fund balances at December 31, 2016: Nonmajor Funds Special Revenue Funds Tax Increment District No. 9 $ 126,719 Tax Increment District No. 10 2,272 Tax Increment District No ,214 Capital Project Funds General Capital Improvements 45,027 Parks Capital Equipment 35,258 These deficits will be eliminated by future levies, collections of special assessments, and operating transfers. NOTE 3 DEPOSITS AND INVESTMENTS A. Deposits Custodial Credit Risk Deposits: The City had an investment policy in place to address custodial credit risk for deposits, stating all deposits and investments must be in compliance with Minnesota Statutes 118A. As of December 31, 2016, the City's deposits had a bank balance of $9,555,117 and was not exposed to custodial credit risk because they were fully insured through the FDIC or collateral pledged. At December 31, 2016, the City's deposits had a carrying value as follows: Checking/money market accounts $ 6,449,817 Nonbrokered certificates of deposit 2,822,939 Total deposits $ 9,272,756 45

49 Notes to Financial Statements NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) B. Investments As of December 31, 2016, the City had the following investments: Fair 1 Year Investment Type Value or Less 1-2 Years 3-5 Years 6-10 Years Ratings Pooled investments FHLMC $ 440,025 $ 171,817 $ - $ 268,208 $ - AAA Brokered Certificate of Deposits 1,175, , , , ,198 N/A Money Market 8,320 8, N/A Total pooled investments 1,623, , , , ,198 Non-pooled investments US Treasury Securities 25,161 25, AAA FNMA 3,978,651-3,978, AAA Money Market N/A Total pooled investments 4,004,167 25,516 3,978, Total investments $ 5,627,580 $ 366,423 $ 4,247,963 $ 737,996 $ 275,198 Maximum Maximum Pooled Non-Pooled Maturity Investments Investments 1 Year or Less 21.00% 0.64% 1-2 Years 16.59% 99.36% 3-5 Years 45.46% Years 16.95% - Custodial Credit Risk: Custodial Credit Risk Investments: For an investment, this is the risk in the event of the failure of the counterparty, the City will not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. The City's investment policy states when a broker dealer holds investments purchased by the City in safekeeping, the broker dealer must provide asset protection of $500,000 through the Securities Investor Protector Corporation (SIPC) and at least another $2,000,000 supplemental insurance protection. Some City securities held by the City's broker-dealer are not registered to the City, but are held in an insured account. The account is insured up to $500,000 SIPC insurance and the broker-dealer provides an additional aggregate insurance policy for all of its customers as a group, not individually. It is unknown what portion of this policy is applicable to the City's portfolio. 46

50 Notes to Financial Statements NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) B. Investments (Continued) Concentration of Credit Risk: The City's investment policy states the City will attempt to diversify their investments according to type and maturity. Investments beyond two years should be related to debt payments or other known expenditures. Up to 20% of the portfolio may be invested beyond five years, but not more than ten years in maturity and up to an additional 10% invested in mortgage backed securities. Securities with a maturity of more than five years shall be fixed term securities and not securities whose term can be extended by changes in market conditions. No more than 25% of the portfolio should be invested in any one security issuer with the exception of U.S. Treasury Obligations, which could represent 100% of the portfolio. No more than 40% of the portfolio shall be invested through any one investment institution. The City was exposed to concentration of credit risk at December 31, 2016, because the investments listed below were over 5% of the City's total investment portfolio. Investment Percentage Pooled Federal Home Loan Mortgage Corp 27.10% Capital One Bank Glen Allen VA Certificate of Deposit 7.99% Bankwest Inc Pierre SD Certificate of Deposit 5.71% Comenity Bank Jumbo Certificate of Deposit 6.14% GE Capital Ref Bank Draper UT Certificate of Deposit 6.99% Toyota Financial Savings Henderson NV Certificate of Deposit 11.24% Amex Centurion Certificate of Deposit 9.60% Wells Fargo Bank, NA Sioux Falls SD Certificate of Deposit 8.52% World Financial Network Bank Certificate of Deposit 6.19% State Bank of India NYC Certificate of Deposit 6.28% Non-Pooled Federal Natl Mtg Assn Benchmark 99.06% Interest Rate Risk: The City's investment policy states the City should manage their interest rates based on liquidity, safety and the overall return on the investment. The policy states investments will be diversified as to specific maturity, issuer, and institution in order to minimize risk to the portfolio. Credit Risk: This is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. State law limits investments in commercial paper and corporate bonds to the top two rating issued by nationally recognized statistical rating organizations. The City's investment policy authorizes investment in securities allowed by Minnesota Statutes 118A. The City has the following recurring fair value measurements as of December 31, 2016: $25,161 of investments are valued using quoted market prices (Level 1 inputs) $5,593,744 of investments are valued using a matrix pricing model (Level 2 inputs) 47

51 Notes to Financial Statements NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) C. Deposits and Investments The following is a summary of total deposits and investments: Petty cash $ 2,800 Deposits 9,272,756 Investments 5,627,580 Total $ 14,903,136 Deposits and investments are presented in the December 31, 2016, basic financial statements as follows: Statement of Net Position Cash and investments $ 10,659,802 Cash with fiscal agent 4,004,167 Statement of Fiduciary Net position Cash and investments 239,167 Total deposits and investments 14,903,136 48

52 Notes to Financial Statements NOTE 4 NOTES RECEIVABLE Notes receivable as of December 31, 2016, were as follows: Outstanding Due Within Balance One Year Governmental Funds Echopoint Design & Development, LLC Quarterly interest only payments made January 1, 2013 through January 1, Quarterly payments ranging from $2,325 to $2,366 starting April 2015 through January 2017 with a balloon payment April 2017 of $131,236, with quarterly interest payments at 1.0% interest. $ 133,600 $ 133,600 KFI - Black Swan Cooperage Monthly principal payment ranging from $665 to $758 start September 2012 through January In February 2017 a balloon principal payment of $55,335 is due. Interest is included at 3.0%. 56,086 56,086 Small Cities Grant Program Loans with a 3.0% interest rate were made to seven local businesses. Principal and interest are due monthly through the term of the loan, which ranges from 2014 through ,929 - Armory Square Interest only payments January 1, 2013, April 1, 2013, July 1, 2013, October 1, 2013, and January 1, 2014, and those same dates in each year thereafter until October 1, 2016, at which time the note becomes payable in full. Interest is included at 1.0%. 100, ,000 Interest only payments June 1, 2015, September 1, 2015, December 1, 2015, and March 1, 2016, and those same dates in each and every year until September 30, 2016, at which time the note becomes payable in full. Interest is included at 1.0%. 150, ,000 Total notes receivable $ 479,615 $ 439,686 49

53 Notes to Financial Statements NOTE 5 CAPITAL ASSETS Capital asset activity for the year ended December 31, 2016, was as follows: Governmental activities Capital assets not being depreciated Beginning Ending Balance Increases Decreases Balance Land $ 4,730,053 $ 11,404 $ - $ 4,741,457 Construction in progress 1,678,298 1,242,617 1,684,312 1,236,603 Total capital assets not being depreciated 6,408,351 1,254,021 1,684,312 5,978,060 Capital assets being depreciated Infrastructure 19,302,733 1,776,928-21,079,661 Buildings 5,117, ,537-5,300,388 Buildings - internal service 488, ,760 Machinery and equipment 5,870,006 57,982 5,927,988 Total capital assets being depreciated 30,779,350 2,017,447-32,796,797 Less accumulated depreciation for Infrastructure 5,978, ,958-6,637,005 Buildings 3,019, ,595-3,177,556 Buildings - internal service 145,359 16, ,651 Machinery and equipment 4,634, ,568 4,878,838 Total accumulated depreciation 13,777,637 1,077,413-14,855,050 Total capital assets being depreciated, net 17,001, ,034-17,941,747 Governmental activities capital assets, net $ 23,410,064 $ 2,194,055 $ 1,684,312 $ 23,919,807 50

54 Notes to Financial Statements NOTE 5 CAPITAL ASSETS (CONTINUED) Business-type activities Capital assets not being depreciated Beginning Ending Balance Increases Decreases Balance Land $ 2,757,042 $ - $ - $ 2,757,042 Construction in progress 1,397,384 72,974 1,470,358 - Total capital assets not being depreciated 4,154,426 72,974 1,470,358 2,757,042 Capital assets being depreciated Buildings 3,408, ,408,174 Equipment and systems 34,187,670 1,591,382-35,779,052 Total capital assets being depreciated 37,595,844 1,591,382-39,187,226 Less accumulated depreciation for Buildings 593, , ,906 Equipment and systems 22,763,714 1,438,215-24,201,929 Total accumulated depreciation 23,356,789 1,574,046-24,930,835 Total capital assets being depreciated, net 14,239,055 17,336-14,256,391 Business-type activities capital assets, net $ 18,393,481 $ 90,310 $ 1,470,358 $ 17,013,433 51

55 Notes to Financial Statements NOTE 5 CAPITAL ASSETS (CONTINUED) Depreciation expense was charged to functions/programs of the City as follows: Governmental activities General governmant $ 32,035 Public safety 136,227 Public works 473,236 Park and recreation 70,640 Airport 348,983 Internal service 16,292 Total depreciation expense - governmantal activities $ 1,077,413 Business-type activities Water $ 493,710 Sewer 1,016,254 Liqour 39,965 Storm sewer 24,117 Total depreciation expense - business-type activities $ 1,574,046 NOTE 6 INTERFUND ACTIVITY A. Transfers The composition of interfund transfers as of December 31, 2016, was as follows: General Fire Capital Equipment 2010B G.O. Bond Transfers In 2015A G.O. Improvement Refunding Bond 2008 G.O. Bond 2012 G.O. Crossover Refunding Bond Other Governmental Funds Total Transfers Out General $ - $ 31,000 $ - $ - $ - $ - $ 78,985 $ 109, A G.O. Improvement Refunding Bond , , G.O. Bond , ,862 Other governmental funds , , ,512 Liquor , ,603 Storm water 13,230-20, ,000 53,230 Public works/safety building internal service fund ,656 32,656 Total $ 13,230 $ 31,000 $ 20,000 $ 114,862 $ 655,000 $ 275,107 $ 698,649 $ 1,807,848 The purpose of these transfers were to provide funding for operating purposes, capital projects, close funds and debt service payments. 52

56 Notes to Financial Statements NOTE 6 INTERFUND ACTIVITY (CONTINUED) B. Due To/From Other Funds Payable Fund Receivable Fund Airport Fund (208) 2016A G.O. Bond (325) Other Governmental Funds Total General $ 255,317 $ 18,889 $ 172,146 $ 446,352 The above loan was to eliminate cash deficits in individual funds. NOTE 7 LONG-TERM DEBT A. G.O. Bonds The City issues G.O. bonds to provide financing for street improvements, facility construction, and tax increment projects. Debt service is covered respectively by special assessments, property taxes, and tax increments against benefited properties with any shortfalls being paid from general taxes. G.O. bonds are direct obligations and pledge the full faith and credit of the City. These bonds generally are issued as 15 year serial bonds with equal debt service payments each year. On August 20, 2013, the City issued a PFA Drinking Water Forgivable Grant that is not required to be repaid by the City except if conditions of the agreement are not met. At December 31, 2014, the City had expended the full $818,133 of this PFA Drinking Water Forgivable Grant. Since the City anticipates that this debt will be forgiven, it is not included in the amortization schedules. On June 1, 2015, the City issued $3,845,000 G.O. Improvement and Refunding Bonds, Series 2015A for a refunding of a portion of the $1,215, A G.O. Improvement Bonds. The principal balances of both the refunded and refunding bonds are reported as long-term debt of the City until the call date of the refunded bonds, at which time, the refunded bonds will be considered defeased and the related liability will be removed from the Statement of Net Position. The call date for the 2008A refunded bond is December 1, The refunding was undertaken to reduce total future debt service payments. The refunding resulted in a decrease in future debt service payments of $39,945. The net present value cash flow savings from the transaction was $33,092. The remaining bond proceeds from the 2015A bond will be used to finance capital related projects. 53

57 Notes to Financial Statements NOTE 7 LONG-TERM DEBT A. G.O. Bonds (Continued) On January 14, 2016, the City issued $4,075,000 G.O. Improvement Crossover Refunding Bonds, Series 2016A for a refunding of a portion of the $1,440, A G.O. Improvement Bonds and a portion of the $4,740, B G.O. Improvement Bonds. The principal balances of both the refunded and refunding bonds are reported as long-term debt of the City until the call date of the refunded bonds, at which time, the refunded bonds will be considered defeased and the related liability will be removed from the Statement of Net Position. The call date for the 2010A and 2010B refunded bonds are December 1, The refunding was undertaken to reduce total future debt service payments. The refunding resulted in a decrease in future debt service payments of $153,545. The net present value cash flow savings from the transaction was $125,352. NOTE 7 LONG-TERM DEBT (CONTINUED) A. G.O. Bonds (Continued) Long-term liabilities Governmental activities G.O. Bonds, Including Refunding Bonds G.O. Improvement Bonds, Issue Interest Original Final Principal Due Within Date Rates Issue Maturity Outstanding One Year Series 2010A 06/08/ %-4.00% 1,440,000 12/01/25 $ 940,000 $ 90,000 G.O. Improvement Bonds, Series 2010B 08/24/ %-4.00% 4,740,000 12/01/30 3,585, ,000 G.O. Improvement Refunding Bond, Series 2010C 10/19/ %-2.80% 1,390,000 12/01/19 555, ,000 G.O. Improvement Crossover Refunding Bond, Series 2012A 04/01/ %-3.00% 2,980,000 12/01/27 2,760, ,000 G.O. Improvement and Refunding Bond, Series 2015A 06/01/ %-3.50% 3,845,000 12/01/35 3,720, ,000 G.O. Improvement Crossover Refunding Bond, Series 2016A 01/14/ %-3.00% 4,075,000 12/01/30 4,075,000 - G.O. Capital Improvement Plan Bond, Series 2016B 11/01/ %-3.00% 920,000 12/15/36 920,000 35,000 Premium 123,762 - Compensated absences 121,693 79,100 Total governmental activities 16,800,455 1,034,100 Business-type activities G.O. Bonds, Including Revenue Bonds G.O. Water Revenue Note, Series /15/ % 859,259 08/20/25 459,000 46,000 G.O. Water Revenue Note, Series /20/ % 1,174,617 08/20/33 684,000 35,000 G.O. Water Revenue Forgivable Grant 08/20/ % 818,133 08/20/33 818,133 - Compensated absences 52,840 34,664 Total business-type activities 2,013, ,664 Total all long-term liabilities $ 18,814,428 $ 1,149,764 54

58 Notes to Financial Statements NOTE 7 LONG-TERM DEBT (CONTINUED) B. Changes in Long-Term Liabilities Long-term liability activity for the year ended December 31, 2016, was as follows: Governmental activities Bonds Payable Beginning Ending Due Within Balance Additions Reductions Balance One Year G.O. Improvement Bonds $ 13,475,000 $ 4,995,000 $ 1,915,000 $ 16,555,000 $ 955,000 Premium 60,176 71,782 8, ,762 - Compensated absences 133, , , ,693 79,100 Total governmental activities 13,668,314 5,181,796 2,049,655 16,800,455 1,034,100 Business-type activities Bonds Payable G.O. Revenue Bonds 1,222,598-79,598 1,143,000 81,000 Forgivable grant 818, ,133 - Compensated absences 50,412 40,954 38,526 52,840 34,664 Total business-type activities 2,091,143 40, ,124 2,013, ,664 Total long-term liabilities $ 15,759,457 $ 5,222,750 $ 2,167,779 $ 18,814,428 $ 1,149,764 The General Fund typically liquidates the liabilities related to governmental activities compensated absences. C. Components of Long-Term Liabilities Long-term bonded indebtedness listed above were issued to finance acquisition and construction of capital facilities or to refinance (refund) previous bond issues. Annual debt service requirements to maturity for all bonded debt outstanding as of December 31, 2016, are as listed on the following page. 55

59 Notes to Financial Statements NOTE 7 LONG-TERM DEBT (CONTINUED) C. Components of Long-Term Liabilities (Continued) Governmental Funds Year Ending December 31, Principal G.O. Improvement Bonds Interest Total 2017 $ 955,000 $ 448,227 $ 1,403, ,020, ,479 5,444, ,035, ,756 1,319, , ,186 1,118, , ,209 1,126, ,615, ,334 5,512, ,920, ,475 3,202, ,000 25, ,350 Total $ 16,555,000 $ 2,872,016 $ 19,427,016 Business-Type Activities Year Ending December 31, Principal G.O. Revenue Bonds Interest Total 2017 $ 81,000 $ 22,720 $ 103, ,000 20, , ,000 19, , ,000 17, , ,000 15, , ,000 47, , ,000 17, , ,000 2,188 93,188 Total $ 1,143,000 $ 163,466 $ 1,306,466 D. Conduit Debt Conduit debt obligations are certain limited obligation revenue bonds, or similar debt instruments, issued for the express purpose of providing capital financing for a specific third party. The City has issued various revenue bonds to provide funding to private-sector entities for projects deemed to be in the public interest. Although these bonds bear the name of the City, the City has no obligation for such debt. Accordingly, the bonds are not reported as liabilities in the financial statements of the City. 56

60 Notes to Financial Statements NOTE 7 LONG-TERM DEBT (CONTINUED) D. Conduit Debt (Continued) At December 31, 2016, the following conduit debt was outstanding: Original Amount Balance Project Series of Issue Retired Outstanding Minnesota Revenue Bonds Catholic Health Initiatives 2004 $ 30,860,000 $ 1,135,000 $ 29,725,000 Housing and Health Facilities Revenue Bonds CDC Homes, LLC 2006A 5,575,000 5,575,000 - Development Corporation ,360,000 3,360,000 - Northwest MN Multi-County HRA ,335, ,000 24,035,000 NOTE 8 FUND BALANCE DETAIL Fund equity balances are classified as follows to reflect the limitations and restrictions of the respective funds. 2015A G.O G.O Fire Capital Improvement Crossover Other General Equipment 2010B G.O. Refunding 2016A G.O. Refunding Governmental Fund Airport (208) (492) Bond (321) Bonds (324) Bond (325) Bond (323) Funds Total Nonspendable Prepaids $ 7,741 $ - $ - $ - $ - $ - $ - $ - $ 7,741 Restricted Debt service , ,527 4,000, , ,852 4,967,481 Vehicle forfeitures ,339 31,339 Tax increment financing , ,102 Small cities program grant ,360 3,360 Park dedication ,825 7,825 Assigned Capital projects , , ,734 Fire department 4, ,366 Parks department 19, ,173 Administration equipment 39, ,000 Police department 52, ,024 Heartland Bus 35, ,000 Library building 7, ,000 General government 716, ,112 Economic development , ,056 Airport - 24, ,465 K ,517 6,517 Unassigned 1,843, (223,490) 1,619,933 Total fund balance $ 2,723,839 $ 24,465 $ 182,519 $ 128,358 $ 304,527 $ 4,000,409 $ 272,335 $ 850,776 $ 8,487,228 57

61 Notes to Financial Statements NOTE 9 RISK MANAGEMENT The City purchases commercial insurance coverage through the League of Minnesota Cities Insurance Trust (LMCIT) with other cities in the state, which is a public entity risk pool currently operating as a common risk management and insurance program. The City pays an annual premium to the LMCIT for its insurance coverage. The LMCIT is self-sustaining through commercial companies for excess claims. The City is covered through the pool for any claims incurred but unreported, however, retains risk for the deductible portion of its insurance policies. The amount of these deductibles is considered immaterial to the financial statements. There were no significant reductions in insurance from the previous year or settlements in excess of insurance coverage for any of the past three years. The City's workers' compensation insurance policy is retrospectively rated. With this type of policy, final premiums are determined after loss experience is known. The amount of premium adjustment for 2016 is estimated to be immaterial based on workers' compensation rates and salaries for the year. At December 31, 2016, there were no other claim liabilities reported in the fund based on the requirements of GASB Statement No. 10, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated. NOTE 10 PENSION PLANS Public Employees' Retirement Association The City participates in various pension plans. Total pension expense for the year ended December 31, 2016 was $604,152. The components of pension expense are noted in the following plan summaries. A. Plan Description The City participates in the following cost-sharing multiple-employer defined benefit pension plans administered by PERA. PERA's defined benefit pension plans are established and administered in accordance with Minnesota Statutes, Chapters 353 ad 356. PERA's defined benefit pension plans are tax qualified plans under Section 401(a) of the Internal Revenue Code. General Employees Retirement Plan (General Employees Plan (accounted for in the General Employees Fund)) All full-time and certain part-time employees of the City are covered by the General Employees Plan. General Employees Plan members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. The Basic Plan was closed to new members in All new members must participate in the Coordinated Plan. 58

62 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Public Employees' Retirement Association (Continued) A. Plan Description (Continued) Public Employees Police and Fire Plan (Police and Fire Plan (accounted for in the Police and Fire Fund)) The Police and Fire Plan, originally established for police officers and firefighters not covered by a local relief association, now covers all police officers and firefighters hired since Effective July 1, 1999, the Police and Fire Plan also covers police officers and firefighters belonging to a local relief association that elected to merge with and transfer assets and administration to PERA. B. Benefits Provided PERA provides retirement, disability, and death benefits. Benefit provisions are established by state statute and can only be modified by the state legislature. Benefit increases are provided to benefit recipients each January. Increases are related to the funding ratio of the plan. Members in plans that are at least 90% funded for two consecutive years are given 2.5% increases. Members in plans that have not exceeded 90% funded, or have fallen below 80%, are given 1% increases. The benefit provisions stated in the following paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. General Employees Plan Benefits General Employees Plan benefits are based on a member's highest average salary for any five successive years of allowable service, age and years of credit at termination of service. Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher of a step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2% of average salary for each of the first ten years of service and 2.7% for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2% of average salary for each of the first ten years and 1.7% for each remaining year. Under Method 2, the annuity accrual rate is 2.7% of average salary for Basic Plan members and 1.7% for Coordinated Plan members for each year of service. For members hired prior to July 1, 1989, a full annuity is available when age plus years of service equal 90 and normal retirement age is 65. For members hired on or after July 1, 1989, normal retirement age is the age for unreduced Social Security benefits capped at

63 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Public Employees' Retirement Association (Continued) B. Benefits Provided (Continued) Police and Fire Plan Benefits Benefits for the Police and Fire Plan members first hired after June 30, 2010, but before July 1, 2014, vest on a prorated basis from 50% after five years up to 100% after ten years of credited service. Benefits for Police and Fire Plan members first hired after June 30, 2014, vest on a prorated basis from 50% after ten years up to 100% after 20 years of credited service. The annuity accrual rate is 3% of average salary for each year of service. For Police and Fire Plan who were first hired prior to July 1, 1989, a full annuity is available when age plus years of service equal at least 90. C. Contributions Minnesota Statutes Chapter 353 sets the rates for employer and employee contributions. Contribution rates can only be modified by the state legislature. General Employees Fund Contributions Basic Plan members and Coordinated Plan members were required to contribute 9.1% and 6.5%, respectively, of their annual covered salary in calendar year The City was required to contribute 11.78% of pay for Basic Plan members and 7.50% for Coordinated Plan members in calendar year The City's contributions to the General Employees Fund for the year ended December 31, 2016, were $76,291. The City's contributions were equal to the required contributions as set by state statute. Police and Fire Fund Contributions Plan members were required to contribute 10.8% of their annual covered salary in calendar year The City was required to contribute 16.2% of pay for PEPFF members in calendar year The City's contributions to the Police and Fire Fund for the year ended December 31, 2016, were $93,159. The City's contributions were equal to the required contributions as set by state statute. 60

64 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Public Employees' Retirement Association (Continued) D. Pension Costs General Employees Fund Pension Costs At December 31, 2016, the City reported a liability of $1,250,404 for its proportionate share of the General Employees Fund's net pension liability. The City's net pension liability reflected a reduction due to the State of Minnesota's contribution of $6 million to the fund in The State of Minnesota is considered a non-employer contributing entity and the State's contribution meets the definition of a special funding situation. The State of Minnesota's proportionate share of the net pension liability associated with the City totaled $16,330. The net pension liability was measured as of June 30, 2016, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The City's proportion of the net pension liability was based on the City's contributions received by PERA during the measurement period for employer payroll paid dates from July 1, 2015, through June 30, 2016, relative to the total employer contributions received from all of PERA's participating employers. At June 30, 2016, the City's proportion share was %, which was a decrease of % from its proportion measured as of June 30, For the year ended December 31, 2016, the City recognized pension expense of $155,415 for its proportionate share of General Employees Plan's pension expense. In addition, the City recognized an additional $4,869 as pension expense (and grant revenue) for its proportionate share of the State of Minnesota's contribution of $6 million to the General Employees Fund. At December 31, 2016, the City reported its proportionate share of the General Employees Plan's deferred outflows of resources and deferred inflows of resources, and its contributions subsequent to the measurement date, related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual economic experience $ - $ 101,576 Changes in actuarial assumptions 244,831 - Difference between projected and actual investment earnings 237,333 - Changes in proportion - 61,427 Contributions paid to PERA subsequent to the measurement date 38,146 - Total $ 520,310 $ 163,003 61

65 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Public Employees' Retirement Association (Continued) D. Pension Costs (Continued) General Employees Fund Pension Costs (Continued) $38,146 reported as deferred outflows of resources related to pensions resulting from City contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, Other amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Year Ending December 31, Pension Expense Amount 2017 $ 81, , , ,165 Total $ 319,161 Police and Fire Fund Pension Costs At December 31, 2016, the City reported a liability of $2,407,904 for its proportionate share of the Police and Fire Fund's net pension liability. The net pension liability was measured as of June 30, 2016, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The City's proportion of the net pension liability was based on the City's contributions received by PERA during the measurement period for employer payroll paid dates from July 1, 2015, through June 30, 2016, relative to the total employer contributions received from all of PERA's participating employers. At June 30, 2016, the City's proportion was %, which was a decrease of % from its proportion measured as of June 30, For the year ended December 31, 2016, the City recognized pension expense of $403,299 for its proportionate share of the Police and Fire Fund pension expense. The City also recognized $5,400 for the year ended December 31, 2016, as pension expense (and grant revenue) for its proportionate share of the State of Minnesota's on-behalf contributions to the Police and Fire Fund. Legislation passed in 2013 required the State of Minnesota to begin contributing $9 million to the Police and Fire Fund each year, starting in fiscal year At December 31, 2016, the City reported its proportionate share of the Police and Fire Plan's deferred outflows of resources and deferred inflows of resources related to pensions from the sources below and on the following page. 62

66 Notes to Financial Statements NOTE 10 PENSION PLANS Public Employees' Retirement Association (Continued) D. Pension Costs (Continued) Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual economic experience $ - $ 276,232 Changes in actuarial assumptions 1,325,176 - Difference between projected and actual investment earnings 367,466 - Changes in proportion - 40,339 Contributions paid to PERA subsequent to the measurement date 46,579 - Total $ 1,739,221 $ 316,571 $46,579 reported as deferred outflows of resources related to pensions resulting from City contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, Other amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: Year Ending December 31, Pension Expense Amount 2017 $ 295, , , , ,594 Total $ 1,376,071 63

67 Notes to Financial Statements NOTE 10 PENSION PLANS Public Employees' Retirement Association (Continued) E. Actuarial Assumptions The total pension liability in the June 30, 2016, actuarial valuation was determined using the entry age normal actuarial cost method and the following actuarial assumptions: Inflation 2.50 % Per year Active member payroll growth 3.25 % Per year Investment rate of return 7.50 % Salary increases were based on a service-related table. Mortality rates for active members, retirees, survivors, and disabilitants were based on RP-2014 tables for the General Employees Plan and RP-2000 tables for the Police and Fire Plan for males or females, as appropriate, with slight adjustments. Cost of living benefit increases for retirees are assumed to be 1% for all future years for the General Employees Plan and Police and Fire Plan. Actuarial assumptions used in the June 30, 2016, valuation were based on the results of actuarial experience studies. The most recent four-year experience study in the General Employees Plan was completed in The experience study for Police and Fire Plan was for the period July 1, 2004 through June 30, The following changes in actuarial assumptions occurred in 2016: General Employees Fund The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2035 and 2.5% per year thereafter to 1.0% per year for all future years. The assumed investment return was changed from 7.9% to 7.5%. The single discount rate was changed from 7.9% to 7.5%. Other assumptions were changed pursuant to the experience study dated June 30, The assumed future salary increases, payroll growth, and inflation were decreased by 0.25% to 3.25% for payroll growth and 2.50% for inflation. Police and Fire Fund The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2037 and 2.5% thereafter to 1.0% per year for all future years. The assumed investment return was changed from 7.9% to 7.5%. The single discount rate changed from 7.9% to 5.6%. The assumed future salary increases, payroll growth, and inflation were decreased by 0.25% to 3.25% for payroll growth and 2.50% for inflation. 64

68 Notes to Financial Statements NOTE 10 PENSION PLANS Public Employees' Retirement Association (Continued) E. Actuarial Assumptions (Continued) The State Board of Investment, which manages the investments of PERA, prepares an analysis of the reasonableness on a regular basis of the long-term expected rate of return using a building-block method in which best-estimate ranges of expected future rates of return are developed for each major asset class. These ranges are combined to produce an expected long-term rate of return by weighting the expected future rates of return by the target asset allocation percentages. The target allocation and best estimates of geometric real rates of return for each major asset class are summarized in the following table: Asset Class Target Allocation Long-Term Expected Real Rate of Return Domestic stocks 45% 5.50 % International stocks 15% 6.00 Bonds 18% 1.45 Alternative assets 20% 6.40 Cash 2% 0.50 Total 100% F. Discount Rate The discount rate used to measure the total pension liability in 2016 was 7.5%, a reduction from the 7.9% used in The projection of cash flows used to determine the discount rate assumed that contributions from Plan members and employers will be made at rates set in Minnesota Statutes. Based on those assumptions, the fiduciary net position of the General Employees Fund was projected to be available to make all projected future benefit payments of current Plan members. Therefore, the longterm expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. In the Police and Fire Fund, the fiduciary net position was projected to be available to make all projected future benefit payments of current plan members through June 30, Beginning in fiscal years ended June 30, 2057 for the Police and Fire Fund, when projected benefit payments exceed the funds projected fiduciary net position, benefit payments were discounted at the municipal bond rate of 2.85% based on an index of 20-year general obligation bonds with an average AA credit rating at the measurement date. An equivalent single discount rate of 5.60% for the Police and Fire Fund was determined that produced approximately the same present value of projected benefits when applied to all years of projected benefits as the present value of projected benefits using 7.50% applied to all years of projected benefits through the point of asset depletion and 2.85% after. 65

69 Notes to Financial Statements NOTE 10 PENSION PLANS Public Employees' Retirement Association (Continued) G. Pension Liability Sensitivity The following table presents the City's proportionate share of the net pension liability for all plans it participates in, calculated using the discount rate disclosed in the preceding paragraph, as well as what the City's proportionate share of the net pension liability would be if it were calculated using a discount rate 1 percentage point lower or 1 percentage point higher than the current discount rate: City's proprionate share of the General Employees Fund net pension liability City's proprionate share of the Police and Fire Fund net pension liability 1% Decrease in 1% Increase in Discount Rate Discount Rate Discount Rate (6.5%) (7.5%) (8.5%) $ 1,775,944 $ 1,250,404 $ 817,502 1% Decrease in 1% Increase in Discount Rate Discount Rate Discount Rate (4.6%) (5.6%) (6.6%) $ 3,370,747 $ 2,407,904 $ 1,621,189 H. Pension Plan Fiduciary Net Position Detailed information about each pension plan's fiduciary net position is available in a separately-issued PERA financial report that includes financial statements and required supplementary information. That report may be obtained on the Internet at Defined Benefit Pension Plan Volunteer Fire Fighter's Relief Association A. Plan Description The Fire Fighter's Relief Association is the administrator of a single employer defined benefit pension plan established to provide benefits for members of the Fire Department per Minnesota State Statutes. The Association issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to Fire Fighter's Association, 212 West 2 nd St, Park Rapids, Minnesota 56470, or by calling

70 Notes to Financial Statements NOTE 10 PENSION PLANS Defined Benefit Pension Plan Volunteer Fire Fighter's Relief Association B. Benefits Provided Volunteer firefighters of the City are members of the Fire Fighter's Relief Association. Full retirement benefits are payable to members who have reached age 50 and have completed 15 years of service for monthly service pension, or ten years of service for lump sum service pension. Partial benefits are payable to members who have reached 50 and have completed ten years of service. Disability benefits and widow and children's survivor benefits are also payable to members or their beneficiaries based upon requirements set forth in the bylaws. These benefit provisions and all other requirements are consistent with enabling state statutes. C. Employees Covered by Benefit Terms At December 31, 2015, the following employees were covered by the benefit terms: Inactive members entitled to but not yet receiving benefits 4 Active members 27 Total 31 D. Contributions. Minnesota Statutes Chapter 424A.092 specifies minimum support rates required on an annual basis. The minimum support rates from the municipality and from State aids are determined as the amount required to meet the normal cost plus amortizing any existing prior service costs over a ten year period. The City's obligation is the financial requirement for the year less state aids. Any additional payments by the City shall be used to amortize the unfunded liability of the relief association. The Association is comprised of volunteers: therefore, there are no payroll expenditures (i.e. there are no covered payroll percentage calculations). During the year, the City recognized as revenue and as an expenditure an on behalf payment of $82,133 made by the State of Minnesota for the Relief Association. E. Net Pension Liability The City's net pension liability was measured as of December 31, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. Actuarial assumptions. The total pension liability in the December 31, 2015, actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 0.00 % Salary increase 2.50 %, average, including inflation Investment rate of return 6.00 %, net of pensions plan investment expense: including inflation 67

71 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Defined Benefit Pension Plan Volunteer Fire Fighter's Relief Association (Continued) E. Net Pension Liability (Continued) The value of death benefits is similar to the value of the retirement pension. Because of low retirement ages, the plan assumes no pre-retirement mortality. Post-retirement mortality does not apply as the benefit structure and form of payment do not reflect lifetime benefits. The long-term return on assets has been set based on the plan's target investment allocation along with long-term return expectations by asset class. When there is sufficient historical evidence of market outperformance, historical average returns may be considered. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan's target asset allocation as of the measurement date are summarized in the table below. Asset Class Target Allocation Long-Term Expected Real Rate Return Cash and equivalents 6.0% 2.00% Fixed income 26.0% 4.00% High yield fixed income 5.0% 5.50% Equities 45.0% 7.50% Real estate 13.0% 6.50% Other 5.0% 6.00% Total 100.0% F. Discount Rate The discount rate used to measure the total pension liability was 6.00%. Assets were projected using expected benefit payments and expected asset returns. Expected benefit payments by year were discounted using the expected asset return assumption for years in which the assets were sufficient to pay all benefit payments. Any remaining benefit payments after the trust fund is exhausted are discounted at the municipal bond rate. The equivalent single rate is the discount rate. 68

72 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Defined Benefit Pension Plan Volunteer Fire Fighter's Relief Association (Continued) G. Changes in the Net Pension Liability Increase (Decrease) Total Plan Fiduciary Net Pension Net Pension Liability Position Liability (a) (b) (a) - (b) Balances at January 1, 2015 $ 666,117 $ 1,131,331 $ (465,214) Changes for the year Service cost 29,018-29,018 Interest 38,446-38,446 Plan changes 104, ,141 Contributions - 82,746 (82,746) Projected investment return - 68,841 (68,841) Gain or loss - (93,783) 93,783 Benefit payments (50,680) (50,680) - Administrative expense - (40) 40 Net charges 120,925 7, ,841 Balances at December 31, 2015 $ 787,042 $ 1,138,415 $ (351,373) Sensitivity of the net pension liability to changes in the discount rate. The following presents the net pension liability of the City, calculated using the discount rate of 6.00%, as well as what the City's net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (5.00%) or 1-percentage-point higher (7.00%) than the current rate: 1% Current 1% Decrease Discount Increase (5.00%) Rate (6.00%) (7.00%) Relief's net pension liability $ (336,756) $ (351,373) $ (365,160) Pension plan fiduciary net position. Detailed information about the pension plan's fiduciary net position is available in the separately issued relief association financial report. 69

73 Notes to Financial Statements NOTE 10 PENSION PLANS (CONTINUED) Defined Benefit Pension Plan Volunteer Fire Fighter's Relief Association (Continued) H. Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the year ended December 31, 2016, the City recognized pension expense of $35,169. At June 30, 2016, the City reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Net difference between projected and actual earnings on pension plan investments $ 65,251 $ - Contributions paid to Volunteer Firefighter's Relief Association subsequent to the measurement date 82,133 - Total $ 147,384 $ - $82,133 reported as deferred outflows of resources related to pensions resulting from state contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: $ 15,498 15,498 15,500 18,755 Total $ 65,251 I. Payable to the Pension Plan At December 31, 2016, the City reported a payable of $82,133 for the outstanding amount of contributions to the pension plan required for the year ended June 30,

74 Notes to Financial Statements NOTE 11 POST EMPLOYMENT HEALTH CARE PLAN The City provides continued medical coverage to retirees upon retirement in the form of paying one-half of a retiree's accumulated sick time towards medical benefits. As of December 31, 2015, there were no retirees receiving these benefits. Employees of the City pay health care premiums based on their age and level of coverage. Since the insurance rate is based on age, the City does not have an implicit rate subsidy factor in post employment health care expenses. The implicit rate subsidy accounts for the difference employees would pay if there were no retirees on the City's insurance policy. Due to these circumstances, the City has not implemented GASB Statement No. 45, Accounting for Post Employment Benefits. Additionally, the City's total other post employment benefits liability is immaterial. NOTE 12 COMMITMENTS At December 31, 2016, the City had the following commitments relating to contracts: Contract Work Commitment Project Amount Completed Remaining Fire Hall Expansion $ 825,112 $ 815,815 $ 9,297 City Hall Remodel 54,841 3,000 51,841 Airport Apron and Taxiway A Rehab 1,507,183-1,507,183 NOTE 13 TAX INCREMENT FINANCING The City has entered into seven Tax Increment Financing agreements which meet the criteria for disclosure under Governmental Accounting Standards Board Statement No. 77 Tax Abatement Disclosures. The City's authority to enter into these agreements comes from Minnesota Statute 469. The City entered into these agreements for the purpose of economic development. Under each agreement, the City and developer agree on an amount of development costs to be reimbursed to the developer by the City though tax revenues from the additional taxable value of the property generated by the development (tax increment). A "pay-as-you-go" note is established for this amount, on which the City makes payments for a fixed period of time with available tax increment revenue after deducting for certain administrative costs. During the year ended December 31, 2016, the City generated $169,843 in tax increment revenue and made $134,211 in payments to developers. NOTE 14 NEW STANDARDS ISSUED BUT NOT YET IMPLEMENTED GASB has issued GASB statement 75 relating to accounting and financial reporting for postemployment benefits other than pensions. The new statement requires governments in all types of OPEB plans to present more extensive note disclosures and required supplementary information (RSI) about OPEB liabilities. This statement is effective for financial statements for fiscal years beginning after June 15,

75 Notes to Financial Statements NOTE 14 NEW STANDARDS ISSUED BUT NOT YET IMPLEMENTED GASB has issued GASB statement 80 relating to blending requirements for certain component units. The new statement amends the blending requirements for financial statement presentation of component units. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. This statement is effective for financial statements for fiscal years beginning after June 15,

76 REQUIRED SUPPLEMENTARY INFORMATION 73

77 Schedule of City's Proportionate Share of Net Pension Liability General Employees Retirement Fund Last Ten Years* For Fiscal Year Ended June 30, City's Proportionate Share (Percentage) of the Net Pension Liability (Asset) City's Proportionate Share (Amount) of the Net Pension Liability (Asset) State's Proportionate Share (Amount) of the Net Pension Liability Associated with the City City's Proportionate Share of the Net Pension Liability and the State's Proportionate Share of the Net Pension Liability Associated with the City City's Covered- Employee Payroll City's Proportionate Share of the Net Pension Liability (Asset) as a Percentage of its Covered- Employee Payroll Plan Fiduciary Net Position as a Percentage of the Total Pension Liability % $ 834,386 $ - $ 834,386 $ 929, % 78.19% % 1,250,404 16,330 1,266, , % 68.91% Schedule of City's Proportionate Share of Net Pension Liability Public Employees Police and Fire Retirement Fund Last Ten Years* For Fiscal Year Ended June 30, City's Proportion of the Net Pension Liability (Asset) City's Proportionate Share of the Net Pension Liability (Asset) City's Covered- Employee Payroll City's Proportionate Share of the Net Pension Liability (Asset) as a Percentage of its Covered-Employee Payroll Plan Fiduciary Net Position as a Percentage of the Total Pension Liability % $ 704,465 $ 549, % 86.61% % 2,407, , % 63.88% * These schedules are intended to show information for ten years. Additional years will be displayed as they become available. 74

78 Schedule of City Contributions - General Employees Retirement Fund Last Ten Years* Fiscal Year Ending December 31, Statutorily Required Contribution Contributions in Relation to the Statutorily Required Contributions Contribution Deficiency (Excess) City's Covered- Employee Payroll Contributions as a Percentage of Covered- Employee Payroll 2015 $ 72,680 $ 72,680 $ - $ 969, % ,291 76,291-1,017, % Schedule of City Contributions - Public Employees Police and Fire Retirement Fund Last Ten Years* Fiscal Year Ending December 31, Statutorily Required Contribution Contributions in Relation to the Statutorily Required Contributions Contribution Deficiency (Excess) City's Covered- Employee Payroll Contributions as a Percentage of Covered- Employee Payroll 2015 $ 95,705 $ 95,705 $ - $ 590, % ,159 93, , % * These schedules are intended to show information for ten years. Additional years will be displayed as they become available. 75

79 Schedule of Changes in Net Pension Liability and Related Ratios - Fire Relief Association Measurement Date Total Pension Liability (TPL) Service cost $ 26,707 $ 29,018 Interest 48,975 38,446 Changes of benefit terms - 104,141 Benefit payments, including refunds or member contributions (355,000) (50,680) Net change in total pension liability (279,318) 120,925 Beginning of year (1) 945, ,117 End of year $ 666,117 $ 787,042 Plan Fiduciary Net Pension (FNP) Contributions $ 83,357 $ 82,746 Net investment income 87,096 (24,942) Benefit payments, including refunds of member contributions (355,000) (50,680) Administrative expense - (40) Net change in plan fiduciary net position (184,547) 7,084 Beginning of year 1,315,878 1,131,331 End of year $ 1,131,331 $ 1,138,415 Net Pension Liability (NPL) $ (465,214) $ (351,373) The City implemented the Provisions of Governmental Accounting Standards Board Statement No. 68 for the year ended December 31, The schedules within the Required Supplementary Information section required a ten-year presentation, but does not require retroactive reporting. Information prior to 2014 is not available. Additional years will be reported as the become available. Plan fiduciary net position as a percentage of the total pension liability 58.88% 69.13% Covered employee payroll n/a n/a Net pension liability as a percentage of covered payroll n/a n/a 76

80 Schedule of Employer Contributions and Non-Employer Contributing Entities - Fire Relief Association Employer Statutorily determined contribution (SDC) $ - $ - $ - Contribution in relation to the SDC Contribution deficiency (excess) $ - $ - $ - Non-employer 2% aid $ 81,737 $ 81,746 $ 82,133 Covered employee payroll n/a n/a n/a Contributions as a percentage of covered employee payroll n/a n/a n/a The City implemented the Provisions of Governmental Accounting Standards Board Statement No. 68 for the year ended December 31, The schedules within the Required Supplementary Information section required a ten-year presentation, but does not require retroactive reporting. Information prior to 2014 is not available. Additioanl years will be reported as they become available. 77

81 Notes to Required Supplementary Information GENERAL EMPLOYEES FUND 2016 Changes Changes in Actuarial Assumptions The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2035 and 2.5% per year thereafter to 1.0% per year for all future years. The assumed investment return was changed from 7.9% to 7.5%. The single discount rate was changed from 7.9% to 7.5%. Other assumptions were changed pursuant to the experience study dated June 30, The assumed future salary increases, payroll growth, the inflation were decreased by 0.25% to 3.25% for payroll growth and 2.50% for inflation Changes Changes in Plan Provisions On January 1, 2015, the Minneapolis Employees Retirement Fund was merged into the General Employees Fund, which increased the total pension liability by $1.1 billion and increased the fiduciary plan net position by $892 million. Upon consolidation, state and employer contributions were revised. Changes in Actuarial Assumptions The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2030 and 2.5% per year thereafter to 1.0% per year through 2035 and 2.5% per year thereafter. POLICE AND FIRE FUND 2016 Changes Changes in Actuarial Assumptions The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2037 and 2.5% thereafter to 1.0% per year for all future years. The assumed investment return was changed from 7.9% to 7.5%. The single discount rate changed from 7.9% to 5.6%. The assumed future salary increases, payroll growth, and inflation were decreased by 0.25% to 3.25% for payroll growth and 2.50% for inflation Changes Changes in Plan Provisions The post-retirement benefit increase to be paid after attainment of the 90% funding threshold was changed, from inflation up to 2.5%, to a fixed rate of 2.5%. Changes in Actuarial Assumptions The assumed post-retirement benefit increase rate was changed from 1.0% per year through 2030 and 2.5% per year thereafter to 1.0% per year through 2037 and 2.5% per year thereafter. 78

82 SUPPLEMENTARY INFORMATION 79

83 (THIS PAGE LEFT BLANK INTENTIONALLY) 80

84 Detailed Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual - General Fund Year Ended December 31, 2016 Budgeted Amounts Original and Final Actual Amounts Variance with Final Budget - Over (Under) Revenues Property taxes $ 1,792,729 $ 1,809,785 $ 17,056 Franchise taxes 163, ,745 10,745 Miscellaneous taxes 65,000 80,269 15,269 Licenses and permits 74,200 89,894 15,694 Intergovernmental revenue Local government aid 477, ,864 - Market value credit PERA aid 3,521 11,675 8,154 Fire aid 70,000 82,133 12,133 Police aid 66,000 81,310 15,310 Federal grants 3,000 2,829 (171) Other grants and aids 87,889 43,134 (44,755) Total intergovernmental revenue 708, ,150 (9,124) Charges for services General government 39,550 73,925 34,375 Public safety 130, ,873 4,723 Public works - 1,437 1,437 Park and recreation Economic development 11,000 8,813 (2,187) Total charges for services 181, ,998 38,798 Fines and forfeitures 28,000 44,768 16,768 Miscellaneous revenues Investment income 40,000 48,786 8,786 Contributions and donations - 37,498 37,498 Other - 42,751 42,751 Total miscellaneous revenues 40, ,035 89,035 Total revenues 3,052,403 3,246, ,241 Expenditures General government Mayor and council 34,012 30,447 (3,565) Administrative and finance 307, , Other general government 397, ,731 27,985 Capital outlay 11,500 3,007 (8,493) Total general government 751, ,079 15,988 81

85 Detailed Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual - General Fund Year Ended December 31, 2016 Expenditures Public safety Police Budgeted Amounts Original and Final Actual Amounts Variance with Final Budget - Over (Under) Current $ 1,044,696 $ 1,039,764 $ (4,932) Capital outlay 15,000 31,985 16,985 Total police 1,059,696 1,071,749 12,053 Fire Current 229, ,765 6,955 Other Current 69,136 81,434 12,298 Total public safety 1,358,642 1,389,948 31,306 Public works Streets and highways Street maintenance and storm sewers 475, ,272 25,108 Snow and ice removal 47,923 35,544 (12,379) Street lighting 91,859 99,864 8,005 Street construction capital outlay 30,000 - (30,000) Street - other capital outlay 7,000 - (7,000) Total public works 651, ,680 (16,266) Park and recreation Libraries Current 96,361 93,296 (3,065) Other park and recreation Current 100, ,670 36,020 Total park and recreation 197, ,966 32,955 Economic development Current 40,000 41,020 1,020 Nature and conservation Current 22,713 6,068 (16,645) Total expenditures 3,021,403 3,069,761 48,358 Excess of revenues over expenditures 31, , ,883 82

86 Detailed Schedule of Revenues, Expenditures, and Changes and Fund Balances - Budget and Actual - General Fund Year Ended December 31, 2016 Budgeted Amounts Original and Final Actual Amounts Variance with Final Budget - Over (Under) Other Financing Sources (Uses) Insurance refund $ - $ - $ - Transfers in - 13,230 13,230 Transfers out (31,000) (109,985) (78,985) Total other financing sources (uses) (31,000) (96,755) (65,755) Net change in fund balances $ - 80,128 $ 80,128 Fund Balances Beginning of year 2,643,711 End of year $ 2,723,839 83

87 Combining Balance Sheet - Nonmajor Governmental Funds December 31, 2016 Special Revenue Vehicle Forfeitures (115) Economic Development (225) Tax Increment District No. 1 (237) Assets Cash and investments $ 31,908 $ 266,656 $ 104,141 Cash with fiscal agent Taxes receivable - delinquent Special assessments receivable Delinquent Deferred Accounts receivable Due from other governments Land held for resale - 55,400 - Notes receivable - 439,686 - Total assets $ 31,933 $ 761,742 $ 104,141 Liabilities Accounts and contracts payable $ 594 $ - $ - Due to other funds Total liabilities Deferred Inflows of Resources Unavailable revenue - notes receivable - 439,686 - Unavailable revenue - property taxes Unavailable revenue - special assessments Total deferred inflows of resources - 439,686 - Fund Balances Restricted 31, ,141 Assigned - 322,056 - Unassigned Total fund balances 31, , ,141 Total liabilities, deferred inflows of resources, and fund balances $ 31,933 $ 761,742 $ 104,141 84

88 Special Revenue Tax Increment District No. 7 (234) Tax Increment District No. 8 (235) Tax Increment District No. 9 (236) Small Cities Program Grant (150, 152) K-9 (110) $ 16,373 $ 247,588 $ - $ - $ 6, , ,929 - $ 16,373 $ 247,588 $ - $ 43,546 $ 6,517 $ - $ - $ 23,460 $ - $ , , , ,929-16, ,588-3, , (126,719) , ,588 (126,719) 3,360 6,517 $ 16,373 $ 247,588 $ - $ 43,546 $ 6,517 85

89 Combining Balance Sheet - Nonmajor Governmental Funds December 31, 2016 Special Revenue Park Dedication (140) Tax Increment District No. 10 (238) Tax Increment District No. 11 (239) Assets Cash and investments $ 7,825 $ - $ - Cash with fiscal agent Taxes receivable - delinquent Special assessments receivable Delinquent Deferred Accounts receivable Due from other governments Land held for resale - - Notes receivable Total assets $ 7,825 $ - $ - Liabilities Accounts and contracts payable $ - $ - $ - Due to other funds - 2,272 14,214 Total liabilities - 2,272 14,214 Deferred Inflows of Resources Unavailable revenue - notes receivable Unavailable revenue - property taxes Unavailable revenue - special assessments Total deferred inflows of resources Fund Balances Restricted 7, Assigned Unassigned - (2,272) (14,214) Total fund balances 7,825 (2,272) (14,214) Total liabilities, deferred inflows of resources, and fund balances $ 7,825 $ - $ - 86

90 Debt Service Capital Projects 2010C G.O. Bond (322) 2010A G.O. Bond (320) General Capital Improvements (401) Riverside Area (444) Parks Capital Equipment (493) Total Governmental Funds $ 19,993 $ 237,221 $ - $ 228,616 $ - $ 1,166, ,806 1,358 7, ,475 26, , , , ,790 91, , ,642 4, , , , ,615 $ 204,666 $ 513,780 $ 107,296 $ 228,616 $ - $ 2,274,023 $ - $ - $ - $ 155,401 $ 35,258 $ 214, , , , ,401 35, , ,615 1,806 1,358 7, , , ,699 92, , , , , ,036,388 24, , , , , (45,027) - (35,258) (223,490) 24, ,723 (45,027) 73,215 (35,258) 850,776 $ 204,666 $ 513,780 $ 107,296 $ 228,616 $ - $ 2,274,023 87

91 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Governmental Funds Year Ended December 31, 2016 Special Revenue Vehicle Forfeitures (115) Economic Development (225) Tax Increment District No. 1 (237) Tax Increment District No. 5 (231) Revenues Property taxes $ - $ - $ - $ - Tax increments Special assessments Miscellaneous Investment income 29 5, Other 10,250 18, Total revenues 10,279 23, Expenditures Current General government Public safety 3, Public works Park and recreation Economic development Debt service Principal Interest and other charges Capital outlay General government Public safety Public works Park and recreation Total expenditures 4, Excess of revenues over (under) expenditures 6,121 23,517 (597) - Other Financing Sources (Uses) Transfers in ,071 Transfers out Total other financing sources (uses) ,071 Net change in fund balances 6,121 23,517 (597) 20,071 Fund Balances Beginning of year 25, , ,738 (20,071) End of year $ 31,339 $ 322,056 $ 104,141 $ - 88

92 Special Revenue Tax Increment District No. 6 (232) Tax Increment District No. 7 (234) Tax Increment District No. 8 (235) Tax Increment District No. 9 (236) Small Cities Program Grant (150, 152) K-9 (110) SCDP Grant 2010 (151) $ - $ - $ - $ - $ - $ - $ ,402 55,185 58, (15) 16, ,421 55,414 58,397 16, , ,653-27, ,662 16,604 46, ,369 23,965 47,586 27,229-22,499 (636) 4,052 31,449 10,811 (10,934) 7 (22,499) (28,868) (28,868) (29,504) 4,052 31,449 10,811 (10,934) 7 (22,499) 29,504 12, ,139 (137,530) 14,294 6,510 22,499 $ - $ 16,373 $ 247,588 $ (126,719) $ 3,360 $ 6,517 $ - 89

93 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Governmental Funds Year Ended December 31, 2016 Special Revenue Debt Service Park Dedication (140) Tax Increment District No. 10 (238) Tax Increment District No. 11 (239) 2007 G.O. Bond (315) Revenues Property taxes $ - $ - $ - $ 833 Tax increments - 8, Special assessments ,037 Miscellaneous Investment income Other Total revenues 8 8, ,917 Expenditures Current General government Public safety Public works Park and recreation Economic development Debt service Principal Interest and other charges - 7,960 13, Capital outlay General government Public safety Public works Park and recreation Total expenditures - 7,999 14, Excess of revenues over (under) expenditures (14,140) 193,269 Other Financing Sources (Uses) Transfers in Transfers out (275,107) Total other financing sources (uses) (275,107) Net change in fund balances (14,140) (81,838) Fund Balances Beginning of year 7,817 (3,122) (74) 81,838 End of year $ 7,825 $ (2,272) $ (14,214) $ - 90

94 Debt Service 2003 G.O. Refunding (308) 2010C G.O. Bond (322) 2005 Refunding Bond (314) 2009A G.O. Crossover Refunding (317) 2009B G.O. Refunding (318) $ 20 $ 52,702 $ 1,497 $ 150,266 $ 39, ,315-73, ,119 1, ,111 39, , ,000 70,000-18, ,499 2, , ,499 72, (69,238) 1,256 (85,388) (32,656) ,545 32,656 (215,534) - (10,005) - (453) (215,534) - (10,005) 15,545 32,203 (215,289) (69,238) (8,749) (69,843) (453) 215,289 93,367 8,749 69, $ - $ 24,129 $ - $ - $ - 91

95 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Governmental Funds Year Ended December 31, 2016 Debt Service Capital Projects 2010A G.O. Bond (320) General Capital Improvements (401) Green Acres Project (445) Administration Capital Project (496) Revenues Property taxes $ 46,181 $ - $ - $ - Tax increments Special assessments 57, Miscellaneous Investment income 259 (278) (82) - Other Total revenues 104, (82) - Expenditures Current General government Public safety Public works Park and recreation - - 1,242 - Economic development Debt service Principal 90, Interest and other charges 35, Capital outlay General government Public safety Public works Park and recreation Total expenditures 125,701-1, Excess of revenues over (under) expenditures (21,566) 579 (1,324) (827) Other Financing Sources (Uses) Transfers in 20, ,789 78, Transfers out - (15,545) - - Total other financing sources (uses) 20, ,244 78, Net change in fund balances (1,566) 219,823 77,661 - Fund Balances Beginning of year 239,289 (264,850) (77,661) - End of year $ 237,723 $ (45,027) $ - $ - 92

96 Capital Projects Public Works Capital Equipment (490) Riverside Area (444) Parks Capital Equipment (493) Police Capital Equipment (494) Land Acquisition (495) Total Other Governmental Fund $ - $ - $ - $ - $ - $ 290, , ,663 (27) (303) (13) - (79) 21, ,593 (27) (303) (13) - (79) 907, , ,324 4, , , , , , , , ,969-18,768 35, , , , ,463 35, ,023 76,394 17, ,861 1,437,968 (35,804) (225,326) (76,407) (17,969) (186,940) (530,087) 35,403-55,464 17, , , (545,512) 35,403-55,464 17, , ,137 (401) (225,326) (20,943) - - (376,950) ,541 (14,315) - - 1,227,726 $ - $ 73,215 $ (35,258) $ - $ - $ 850,776 93

97 Statement of Fiduciary Net Position December 31, 2016 Stewardship Fund (872) Assets Current Cash and investments 1,312 Library (876) Escrow Fund (877) Total $ $ 237,103 $ 752 $ 239,167 Other receivables Total assets $ 1,312 $ 237,839 $ 752 $ 239,903 Liabilities Accounts payable $ 1,312 $ 237,839 $ 752 $ 239,903 94

98 Combining Statement of Changes in Assets and Liabilities - All Agency Funds Year Ended December 31, 2016 Stewardship Fund (872) 12/31/15 Additions Deductions 12/31/16 Assets Cash and investments $ 1,311 $ 1 $ - $ 1,312 Liabilities Accounts payable $ 1,311 $ 1 $ - $ 1,312 Community Center (873) 12/31/15 Additions Deductions 12/31/16 Assets Cash and investments $ 3,711 $ 4 $ 3,715 $ - Liabilities Accounts payable $ 3,711 $ 4 $ 3,715 $ - Library (876) 12/31/15 Additions Deductions 12/31/16 Assets Cash and investments $ 234,647 $ 12,577 $ 10,121 $ 237,103 Other receivables Total assets $ 234,951 $ 13,262 $ 10,374 $ 237,839 Liabilities Accounts payable $ 234,951 $ 13,415 $ 10,527 $ 237,839 95

99 Combining Statement of Changes in Assets and Liabilities - All Agency Fund Year Ended December 31, 2016 Escrow Fund (877) 12/31/15 Additions Deductions 12/31/16 Assets Cash and investments $ 4,608 $ 4,240 $ 8,096 $ 752 Liabilities Accounts payable $ 4,608 $ 7,571 $ 11,427 $ 752 All Funds Combined 12/31/15 Additions Deductions 12/31/16 Assets Cash and investments $ 244,277 $ 16,822 $ 21,932 $ 239,167 Other receivables Total assets $ 244,581 $ 17,507 $ 22,185 $ 239,903 Liabilities Accounts payable $ 244,581 $ 20,991 $ 25,669 $ 239,903 96

100 Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report Honorable Mayor and Members of the City Council Park Rapids, Minnesota We have audited, 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, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the, Minnesota, as of and for the year ended December 31, 2016, and the related notes to financial statements, which collectively comprise the City's basic financial statements, and have issued our report thereon dated June 26, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the 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. 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 such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected, on a timely basis. A 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. BerganKDV, Ltd. bergankdv.com 97

101 Internal Control over Financial Reporting (Continued) Our consideration of internal control was for the limited purpose described in the first paragraph of this section 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 were not identified. We did identify certain deficiencies in internal control, described in the accompanying Schedule of Findings and Responses on Internal Control and Legal Compliance that we consider to be material weaknesses, listed as Audit Findings , , and Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. City's Response to Findings The City's response to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses on Internal Control and Legal Compliance. The City's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. St. Cloud, Minnesota June 26,

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