Audit report city of Mercer Island King County
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Audit report city of Mercer Island King County

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Washington State Auditor’s Office Financial Statements Audit Report City of Mercer Island King County Audit Period January 1, 2007 through December 31, 2007 Report No. 1000361 Issue Date December 29, 2008 Washington State Auditor Brian Sonntag December 29, 2008 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 Building, P.O. Box 40021  Olympia, Washington 98504-0021  (360) 902-0370  TDD Relay (800) 833-6388 FAX (360) 753-0646  http://www.sao.wa.gov Table of Contents City of Mercer Island King County January 1, 2007 through December 31, 2007 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 ...

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Washington State Auditor’s Office

Financial Statements Audit Report






City of Mercer Island
King County



Audit Period
January 1, 2007 through December 31, 2007


Report No. 1000361


Issue Date
December 29, 2008





Washington State Auditor
Brian Sonntag



December 29, 2008


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 Building, P.O. Box 40021  Olympia, Washington 98504-0021  (360) 902-0370  TDD Relay (800) 833-6388
FAX (360) 753-0646  http://www.sao.wa.gov
Table of Contents

City of Mercer Island
King County
January 1, 2007 through December 31, 2007


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, 2007 through December 31, 2007


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, 2007, which collectively comprise the City‘s
basic financial statements, and have issued our report thereon dated November 7, 2008.

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.

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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

November 7, 2008

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

City of Mercer Island
King County
January 1, 2007 through December 31, 2007


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, 2007, which collectively comprise
the City’s basic financial statements as listed on page 8. 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, 2007, 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 16 and budgetary comparison
information on pages 60 through 61 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
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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

November 7, 2008

_________________________________________________________________________________________________________
Washington State Auditor's Office
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Financial Section

City of Mercer Island
King County
January 1, 2007 through December 31, 2007


REQUIRED SUPPLEMENTAL INFORMATION

Management’s Discussion and Analysis – 2007


BASIC FINANCIAL STATEMENTS

Statement of Net Assets – 2007
Statement of Activities – 2007
Balance Sheet – Governmental Funds – 2007
Statement of Revenues, Expenditures and Changes in Fund Balance – Governmental Funds –
2007 Proprietary Funds – 2007 ues, Expenses and Changes in Net Assets – Proprietary Funds – 2007
Statement of Cash Flows – Proprietary Funds – 2007
Statement of Net Assets – Fiduciary Funds – 2007
Statement of Changes in Fiduciary Net Assets – Fiduciary Funds – 2007
Notes to Financial Statements – 2007

REQUIRED SUPPLEMENTAL INFORMATION

Statement of Revenues, Expenditures, and Changes in Fund Balance – Budget and Actual –
General Fund – 2007 ues and Changes in Fund Badget and Actual –
Street Fund – 2007

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Washington State Auditor's Office
5City of Mercer Island, Washington
City of Mercer Island
Management’s Discussion and Analysis
For the Year Ended December 31, 2007


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, 2007. 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 2006 data is also
included in the discussion.

FINANCIAL HIGHLIGHTS

Key financial highlights for 2007 are as follows:

• Overall, the City’s financial position improved in 2007.

• In total, net assets, the amount by which total assets exceed total liabilities, increased about $6.7
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 $165,679,447, an increase of $5.4
million over 2006. The majority, (86%) of the governmental fund balance is invested in capital
assets, net of related debt, and is therefore not available as a spendable resource.

• During 2007, the City redeemed $990,000 of General Obligation bonds and $421,756 of loans.
Outstanding General Obligation debt at year end was $5,502,008.

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 2007?” 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.

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Washington State Auditor's Office
6City of Mercer Island, Washington
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.

Reporting 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, and the Capital Improvement 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.

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Washington State Auditor's Office
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