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Audit report city of Mercer Island King County

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53 pages
Washington State Auditor’s Office Financial Statements Audit Report City of Mercer Island King County Audit Period January 1, 2006 through December 31, 2006 Report No. 73721 Issue Date December 24, 2007 yyyyyyyyy Washington State Auditor Brian Sonntag December 24, 2007 Council City of Mercer Island Mercer Island, Washington Report on Financial Statements Please find attached our report on the City of Mercer Island’s financial statements. We are issuing this report in order to provide information on the City’s financial condition. In addition to this work, we look at other areas of our audit client’s operations for compliance with state laws and regulations. The results of that audit will be included in a separately issued accountability report. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR Insurance BuildingInsurance Building, P.O. Box 40021 , P.O. Box 40021 Olympia, Washington 98 Olym 504-0021 504- (360)0021 902- (360)0370 902- (866)0370 902- TDD Relay (3900 TDD Relay (800) 833- 800)6388 833-6388 FAX (360) 753-0646 http://www.sao.wa.gov Table of Contents City of Mercer Island King County January 1, 2006 through December 31, 2006 Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards ........................................ 1 Independent ...
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Washington State Auditor’s Office

Financial Statements Audit Report






City of Mercer Island
King County



Audit Period
January 1, 2006 through December 31, 2006


Report No. 73721



Issue Date
December 24, 2007

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Washington State Auditor
Brian Sonntag



December 24, 2007


Council
City of Mercer Island
Mercer Island, Washington


Report on Financial Statements

Please find attached our report on the City of Mercer Island’s financial statements.

We are issuing this report in order to provide information on the City’s financial condition.

In addition to this work, we look at other areas of our audit client’s operations for compliance with state
laws and regulations. The results of that audit will be included in a separately issued accountability
report.

Sincerely,

BRIAN SONNTAG, CGFM
STATE AUDITOR
Insurance BuildingInsurance Building, P.O. Box 40021 , P.O. Box 40021 Olympia, Washington 98 Olym 504-0021 504- (360)0021 902- (360)0370 902- (866)0370 902- TDD Relay (3900 TDD Relay (800) 833- 800)6388 833-6388
FAX (360) 753-0646 http://www.sao.wa.gov
Table of Contents

City of Mercer Island
King County
January 1, 2006 through December 31, 2006


Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance
and Other Matters in Accordance with Government Auditing Standards ........................................ 1
Independent Auditor’s Report on Financial Statements ............................................................................... 3
Financial Section........................................................................................................................................... 5


Independent Auditor’s Report on Internal
Control over Financial Reporting and on
Compliance and Other Matters in Accordance
with Government Auditing Standards

City of Mercer Island
King County
January 1, 2006 through December 31, 2006


Council
City of Mercer Island
Mercer Island, Washington


We have audited the financial statements of the governmental activities, the business-type activities, each
major fund and the aggregate remaining fund information of the City of Mercer Island, King County,
Washington, as of and for the year ended December 31, 2006, which collectively comprise the City‘s
basic financial statements, and have issued our report thereon dated October 16, 2007.

We conducted our audit in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to the financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States.

INTERNAL CONTROL OVER FINANCIAL REPORTING

In planning and performing our audit, we considered the City’s internal control over financial reporting as
a basis for designing our auditing procedures 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 over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the
City’s internal control over financial reporting.

A control deficiency 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
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the City's ability to initiate, authorize, record, process or report
financial data reliably in accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the City's financial statements that is more than
inconsequential will not be prevented or detected by the City's internal control.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the financial statements will not be
prevented or detected by the entity’s internal control.

Our consideration of internal control over financial reporting was for the limited purpose described in the
first paragraph of this section and would not necessarily identify all deficiencies in internal control that
might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal
control over financial reporting that we consider to be material weaknesses, as defined above.

____________________________________________________________________________________________________________
Washington State Auditor's Office
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COMPLIANCE AND OTHER MATTERS

As part of obtaining reasonable assurance about whether the City’s financial statements are free of
material misstatement, we performed tests of the City’s compliance with certain provisions of laws,
regulations, contracts and grant agreements, noncompliance with which could have a direct and material
effect on the determination of 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.

This report is intended for the information and use of management and the Council. However, this report
is a matter of public record and its distribution is not limited. It also serves to disseminate information to
the public as a reporting tool to help citizens assess government operations.


BRIAN SONNTAG, CGFM
STATE AUDITOR

October 16, 2007

____________________________________________________________________________________________________________
Washington State Auditor's Office
2
Independent Auditor’s Report on Financial
Statements

City of Mercer Island
King County
January 1, 2006 through December 31, 2006


Council
City of Mercer Island
Mercer Island, Washington


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 City of Mercer Island,
King County, Washington, as of and for the year ended December 31, 2006, which collectively comprise
the City’s basic financial statements as listed on page 5. These financial statements are the responsibility
of the City’s management. 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 of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the financial statements referred to above 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 City of Mercer Island, as of December 31, 2006, and
the respective changes in financial position and, where applicable, cash flows thereof for the year then
ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report on our consideration
of the City’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 the internal control over financial reporting
or on compliance. That report is an integral part of an audit performed in accordance with Government
Auditing Standards and should be considered in assessing the results of our audit.

The management’s discussion and analysis on pages 6 through 14 and the budgetary comparison
information on pages 48 through 49 are not a required part of the basic financial statements but are
supplementary information required by the Governmental Accounting Standards Board. We have applied
certain limited procedures, which consisted principally of inquiries of management regarding the methods
____________________________________________________________________________________________________________
Washington State Auditor's Office
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of measurement and presentation of the required supplementary information. However, we did not audit
the information and express no opinion on it.


BRIAN SONNTAG, CGFM
STATE AUDITOR

October 16, 2007

____________________________________________________________________________________________________________
Washington State Auditor's Office
4
Financial Section

City of Mercer Island
King County
January 1, 2006 through December 31, 2006


REQUIRED SUPPLEMENTAL INFORMATION

Management’s Discussion and Analysis – 2006


BASIC FINANCIAL STATEMENTS

Statement of Net Assets – 2006
Statement of Activities – 2006
Balance Sheet – Governmental Funds – 2006
Statement of Revenues, Expenditures and Changes in Fund Balance – Governmental Funds –
2006
Reconciliation of Governmental Funds Statement of Revenues, Expenditures and Changes in
Fund Balance to the Statement of Activities – 2006
Statement of Net Assets – Proprietary Funds – 2006
Statement of Revenues, Expenses and Changes in Net Assets – Proprietary Funds – 2006
Statement of Cash Flows – Proprietary Funds – 2006 Fiduciary Funds – 2006
Statement of Changes in Fiduciary Net Assets – Fiduciary Funds – 2006
Notes to Financial Statements – 2006


REQUIRED SUPPLEMENTAL INFORMATION

Schedule of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual –
General Fund – 2006
Scheduesand Changences – Budget and Actual Street
Fund – 2006
____________________________________________________________________________________________________________
Washington State Auditor's Office
5City of Mercer Island
Management’s Discussion qnd Analysis
For the Year Ended December 31, 2006

The discussion and analysis of the City of Mercer Island’s financial performance provides an overall review of the
City’s financial activities for the year ended December 31, 2006. The intent of this discussion and analysis is to look
at the City’s financial performance as a whole. We encourage readers to consider the information presented here
in conjunction with the basic financial statements to enhance their understanding of the City’s financial
performance. For comparison purposes year 2005 data is also included in the discussion.

FINANCIAL HIGHLIGHTS

Key financial highlights for 2006 are as follows:

• Overall, the City’s financial position improved in 2006.

• In total, net assets, the amount by which total assets exceed total liabilities, increased about $5.2 million.
Most of that increase can be attributed to net income from operations in both the governmental and
business type activities.

• Entity wide governmental fund balances at year end were $137,748,207, an increase of $2.6 million from
2005. Over half of the fund balances were in the capital projects funds, such as the Street Fund, for
planned capital expenditures in future years.

• During 2006, the City redeemed $955,000 of General Obligation bonds and $171,749 of loans.
Outstanding General Obligation debt at year end was $5,205,000.

OVERVIEW OF THE FINANCIAL STATEMENTS

The city’s basic financial statements are presented in three parts: 1) government-wide financial statements, 2) fund
financial statements, and 3) notes to the financial statements. These statements are organized so the reader can
understand the City of Mercer Island as a financial whole or as an entire operating entity. The statements then
proceed to provide an increasingly detailed look at specific financial conditions. This section of the management’s
discussion and analysis is intended to introduce and explain the basic financial statements.

The statement of Net Assets and Statement of Activities provide information about the activities of the whole City
presenting both an aggregate view of the City’s finances and a longer-term view of those assets. Major fund
financial statements provide the next level of detail. For governmental funds, these statements tell how services
were financed in the short-term as well as what dollars remain for future spending. The fund financial statements
also look at the City’s most significant funds with all other non-major funds presented in total in one column.

Reporting the City of Mercer Island as a Whole – The Statement of Net Assets and the Statement of
Activities.

The view of the City as a whole looks at all financial transactions and asks the question, “How did we do financially
during 2006?” The Statement of Net Assets and the Statement of Activities answer this question. These statements
include all assets and liabilities using the accrual basis of accounting similar to the accounting used by the private
sector companies. The accrual basis takes into account all of the current year’s revenues and expenses regardless
of when the cash is received or paid.

These two statements report the City’s net assets and changes in those assets. This change in assets is important
because it tells the reader whether, for the City as a whole, the financial position of the City has improved or
diminished. However, in evaluating the overall position of the City, non-financial information such as changes in the
City’s tax base and the condition of the City’s capital assets will also need to be evaluated.

In the Statement of Net Assets and the Statement of Activities, we divide the City into two kinds of activities:

• Governmental Activities—Most of the City’s basic services are reported here, including police, fire,
facilities, parks, planning, engineering and general administration. Taxes (Property, Sales, and Utility) and
charges for services finance most of these activities.

• Business-type activities—The City charges a fee to customers to help it cover all or most of the costs of
certain services it provides. The City charges fees to recoup the cost of the operations of our Water, Sewer,
and Storm Water utilities as well as all capital expenses associated with each utility.
____________________________________________________________________________________________________________
Washington State Auditor's Office
6Reporting the City of Mercer Island’s Most Significant Funds - Fund Financial Statements

The City has established many funds which account for the multitude of services provided to our residents. The
Fund Financial Statements focus on the city’s most significant funds and provide detail on each of these major
funds. In the case of the City of Mercer Island, our major funds are the General Fund, Street Fund, Capital
Improvement Fund, Capital Reserve Fund, and the Community Center Construction Fund. All other funds are
summarized together and included as only one column in the statements.

• Governmental funds—Most of the City’s basic services are reported in governmental funds. The primary
focus of governmental funds is how money flows into and out of the fund and the balances left at year-end
that are available for spending in future periods. Governmental funds are reported using an accounting
method called modified accrual accounting, which measures cash and all other financial assets that can
readily be converted to cash. The governmental fund statements provide a detailed short-term view of the
City’s general government operations and the basic services it provides. Governmental fund information
helps you determine whether there are more or less financial resources that can be spent in the near future
on services to our residents. The relationship (or differences) between governmental activities (reported in
the Statement of Net Assets and the Statement of Activities) and governmental funds is reconciled in the
fund financial statements.

• Proprietary funds—When the City charges customers for the services it provides, these services are
generally reported in proprietary funds. Proprietary funds use the same basis of accounting as business
type activities; therefore, the entity wide statements and the fund statements will essentially match. We use
internal service funds (the other component of proprietary funds) to report activities that provide supplies
and services internally for the City’s other programs and activities. The Equipment Rental and Computer
Equipment Funds are both Internal Service Funds of the City. Both Internal Service Funds predominantly
benefit governmental rather than business type functions and are thus included within governmental
activities in the government-wide financial statements.

• Fiduciary Funds – Assets held by the City in a trustee capacity are accounted for in fiduciary funds.
Fiduciary funds are not included in the government wide financial statements because their assets are not
available to support City activities. The City has two types of fiduciary funds, a pension trust fund and an
agency fund. All of the City’s fiduciary activities are reported in separate Statements of Fiduciary Net
Assets.

Notes to the Financial Statements

The notes to the financial statements provide additional information that is essential to a full understanding of the
data in the government-wide and fund financial statements. The notes are located immediately following the Basic
Financial statements.
____________________________________________________________________________________________________________
Washington State Auditor's Office
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