Agenda - Council Work Session - 06/14/2011

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State Stimulus /Jobs Bill — This jobs creation bill included a number of provisions that applied to cities, including: • Authority for local governments to finance energy conservation improvements and collect repayments as special assessments at the request of the property owner. • Creation of a new "compact development" type of tax increment financing (TIF) district. • Expanded authority to use TIF for general economic development for one year. • Expanded authority to use excess TIF to finance new private development. • Expanded authority for certain cities to use TIF for housing replacement in response to the foreclosure crisis. Interest Rates on Awards and Judgments — The 2010 Legislature exempted government entities from a 2009 law change that increased the required interest rate on awards and judgments over $50,000 to 10 percent, returning the rate to the pre -2009 maximum of the greater of 4 percent or the secondary market rate of one year U.S. Treasury bills as determined in December each year. Pension Funding and Sustainability — The 2010 Legislature made a number of changes to improve the sustainability of state -wide pension plans, including those administered by the Public Employees Retirement Association (PERA). Among the changes to the Public Employee Retirement Fund Coordinated Plan were required increases to the employer and employee contribution rates of 0.25 percent of salary each, effective January 1, 2011. Public Employee's Police and Fire Fund employee and employer contribution rates also increased 0.2 percent and 0.3 percent of salary, respectively, effective January 1, 2011. STATE OUTLOOK AND IMPORTANCE OF INTERNAL CONTROLS The state of Minnesota has experienced a series of major budget shortfalls and a steadily deteriorating financial condition in recent years. Local govermnents and other entities dependent on the state for funding have, in turn, had to deal with the resulting state aid cuts, holdbacks, and unallotments. For the fiscal year 2010 -2011 biennium, the state budget was balanced using several large accounting "shifts" and one -time federal stabilization funds that greatly reduced the amount of actual aid reductions necessary. The accounting shifts included delaying state aid payments to and accelerating property tax revenue recognition of Minnesota school districts, essentially utilizing cash "borrowed" from the districts to help balance the state budget. The state intends to pay these shifts back when it has the financial ability. Current state budget projections for 2011 -2012 predict further significant shortfalls that will need to be addressed. Realistically, the state has already used up most of the accounting shifts available for this purpose, and additional federal assistance cannot be counted on. The economy, while showing some signs of recovery, is unlikely to turn around quickly enough to solve the state's budget issues in the short-term. All of this adds up to a period of continued financial uncertainty and a strong likelihood of further funding cuts for Minnesota municipalities. These circumstances have resulted in a sustained cycle of budget reductions for most Minnesota cities. Among our clients, we have seen numerous examples of staffing cuts and reassignments that have potentially weakened internal controls by reducing the segregation of accounting duties or delaying the performance of key control procedures. Unfortunately, the economic downturn has also placed additional financial strain on many individuals, elevating the risk of fraud and theft. Recent communications from the Minnesota Office of the State Auditor have reported a substantial increase in incidents of fraud and theft involving local governments reported to their office recently. A sound system of internal controls is critical to safeguarding city assets and assuring that accurate and timely fmancial information is available to manage the City. When faced with difficult budgetary decisions, we encourage our clients to remain mindful of these factors and to continue to make sound financial controls a top priority. -5-