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DDA Parkers Prairie Office: 1397 ` — 9 County Highway 42 Parkers Prairie,MN 56361 David Drown Associates, Inc. (612)920-3320 ext. 110 1 fax(612)605-2375 Public Finance Advisors August 8,2017 Ms. Nancy Adams, Mayor Ms. Nancy Malecha,City Administrator/Clerk 4638 County Road 11 Pequot Lakes,MN 56472 RE: Summary of 2017 Capital Improvements/Water&Sewer Rate Analysis—Council Packet Honorable Mayor Adams, Members of the City Council,and Ms. Malecha: On Tuesday,July 11,2017 our firm conducted a capital financial planning and water/sewer rate workshop with the City Council. The purpose of that workshop was to assist the City with developing an understanding of the City's financial condition and to provide a tool to evaluate the feasibility of future capital improvement projects and the impact of those on utility rates. This letter summarizes the major findings and conclusions we reached at that presentation. Current Financial Condition—A Comparative Analysis One good way to develop an understanding,or"feeling",for the financial condition of a City is to select several financial measures and compare them with those of similar cities. For Pequot Lakes,we looked at several surrounding cities,along with a few similar-sized, lake communities in the central region of Minnesota. Our findings were as follows: • Pequot Lakes has consistently maintained strong General Fund reserves:Over the past three years the City has maintained well over the 6 months'worth of reserves in its General Fund. This is a strong credit factor for the City and could help protect it from fluctuations in the economy and local government aid. During the last three years,the City has consistently enjoyed a General Fund balance that represented over 69%of General Fund expenditures. Many cities struggle to maintain a 50%level. • Lower LGA funding: Due to the economic strength of Crow Wing County and the Brainerd/Baxter area,Pequot Lakes collects a significantly lower amount of Local Government Aid than the average of the comparison group. As a result,the City understandably has a slightly higher net levy versus the comparable cities. • Smaller tax base: The City is faced with the challenge of having a smaller tax base than the comparable average. • Pequot Lakes has a lower tax rate: Despite the higher net levy,the City enjoys a lower tax rate than the comparable cities! When we consider the fact that Pequot Lakes receives a below average amount of LGA and has a smaller tax base,this is very impressive. • Low Median Household Income: Compared to the average,the City has a lower median household income. Due to the lower wealth level of the community, having a lower tax rate is of great benefit