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HomeMy WebLinkAboutOther Auditor Reports 12/31/2008CITY OF LINO LAKES, MINNESOTA OTHER AUDITOR REPORTS YEAR ENDED DECEMBER 31, 2008 This page left intentionally blank. CITY OF LINO LAKES, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2008 Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Governmental Auditing Standards Report on Minnesota Legal Compliance Other Required Auditor Communications Page 0 0 New Accounting and Reporting Standards 13 This page left intentionally blank. LarsonAllene LLP CPAs, Consultants & Advisors www.larsonallen.com 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 Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota 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 Lino Lakes, Minnesota as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 26, 2009. We conducted our audit in accordance with U.S. generally accepted auditing standards and the standards applicable to 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. 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 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. 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. Our consideration of the internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control that we consider to be material weaknesses, as defined above. 1 LarsonAllen LLP is a member of Nexia Internation , a worldwide network of independent accounting and consulting firms. INTERNATIONAL Honorable Mayor and Members of the City Council City of Lino Lakes 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 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. During the course of our audit, several items came to our attention that we feel could be addressed by the City of Lino Lakes to more efficiently run the City's operations or improve its internal controls. We herein submit the following suggestions to the City of Lino Lakes for their consideration. Auditor Comments: Capital Project Deficits The financial statements for the capital project funds are presented in Statements 3, 5, 12, and 13 of the 2008 Annual Financial Report. As of December 31, 2008, four capital project funds have deficit fund balances equaling a combined deficit of $1,716,501. While this is an on-going comment, we would like to recognize the significant improvements made related to fund balance deficits over the past four years. The following describes the status of each of these funds: - One of the deficits is very typical for any city operating a TIF fund (TIF 1-11). This fund showed positive operating results with revenues in excess of expenditures of $60,435 for 2008. - "fhe second deficit is simply a timing difference between expenditures and the related MSA funding source (CSAG 14/8 Reconstruction Project). As anticipated, this fund will continue to run a deficit until the project nears completion and the MSA revenue is recognized. - The third has specifically been addressed by the Council and a plan is being implemented to reduce the deficit over the near future (Dedicated Parks). This fund showed positive operating results with revenues in excess of expenditures of $60,480 for 2008. - The fourth deficit is from the 135E Interchange Fund. The fund was new during 2008 and incurred one expense. This is a County project and at this time the City does not know the final plans of the project. Area and Unit Charge Fund On January 11, 1988, the City Council approved Resolution 1-88, which established the Area and Unit Charge Fund for the City. The purpose of this fund is to collect various area and unit charges to be used to meet debt payments. Before October 1 of each year, the City estimates the required transfer needed to meet debt payments for the subsequent year. In December, these estimated amounts are transferred to the various debt funds. We recommend that the City continue to closely monitor actual versus projected area and unit assessment collections to assure that debt payment requirements will be met. Designations of balances required for debt service is necessary to define discretionary construction balances available to the City. The financing plan for the following bond issues have pledged area and unit charges for the repayment of debt service: • Improvement and Utility Bonds of 2004A • Water Revenue Bonds of 1999B • Water Revenue Bonds of 1996B (2) Honorable Mayor and Members of the City Council City of Lino Lakes The Improvement and Utility Bonds of 2004A have future debt service requirements (principal and interest) totaling $1,396,532. During 2008, transfers of $460,098 and $82,813 were made to the Improvement Bonds of 2005B and Improvement Refunding Bonds of 2003A debt service funds. The Water Revenue Bonds of 1999B were paid off during 2008. The City annually transfers amounts from the Area and Unit Charge Fund to the Water Fund sufficient to help cover the debt services of these bonds. During 2008, no transfer was made to the Water Fund. It is the City's intention to repay the Water Revenue Bonds of 1999B and 1996B with revenues of the Water Fund. If revenues are not sufficient to meet the debt requirements, funds will be transferred from the Area and Unit Charge Fund. DEBT SERVICE FUNDS Debt service funds are a type of governmental fund used to account for the accumulation of resources for the payment of principal and interest on general obligation debt (other than enterprise fund debt). Debt service funds may have one or a combination of revenue sources pledged to retire debt including property taxes, tax increments, special assessments and area and unit charges. The diverse nature of the type of debt included in the same fund type requires careful analysis to determine the adequacy of the fund balance and projected fund balance. The following schedule extracts information from Exhibits 2 and 3 of the 2008 Annual Financial Report to assist in this analysis. "fhe following schedule compares outstanding debt with assets pledged for debt retirement. This comparison provides a means to judge (at least on a preliminary basis) the financial position of each individual debt service fund. Note: Deferred revenue in the above table does not include the future scheduled "interest portion" of the adopted assessment rolls. The 2004A Improvement Bonds also include a pledge from the Area and Unit Fund that has not been included above. (3) December 31, 2008 Deferred Total Remaining Over Fund Deferred Tax Resources Debt Service (Under) Fund Description Balance Revenue Total Levies Available Scheduled Funded General Debt: Certificates of Indebtedness $ 117,925 $ 7,846 $ 125,771 $ 489,508 $ 615,279 $ 232,375 $ 382,904 Lease Revenue Bonds of 1998A 502,810 6,659 509,469 126,788 636,257 410,000 226,257 Public Project Revenue Bonds 1999C 355,116 3,616 358,732 104,570 463,302 194,259 269,043 Tax Abatement Bonds 2006C 55,851 2,683 58,534 3,631,190 3,689,724 3,509,992 179,732 Utility Revenue Bonds 2006D 17,316 153,630 170,946 - 170,946 621,941 (450,995) CIP Refunding Bonds 2006E 61,626 3,292 64,918 3,843,210 3,908,128 3,720,000 188,128 TIF Bonds 2007A 126,659 - 126,659 5,970,514 6,097,173 5,601,433 495,740 $ 1,237,303 $ 177,726 $ 1,415,029 $ 14,165,780 $ 15,580,809 $ 14,290,000 $ 1,290,809 Special Assessment Debt: Improvement Bonds of 2002A $ 262,748 $ 83,522 $ 346,270 $ 29,972 $ 376,242 $ 149,198 $ 227,044 Improvement Bonds of 20028 938,512 386,395 1,324,907 - 1,324,907 1,357,060 (32,153) Improvement Bonds of 2003A 54,728 184,340 239,068 - 239,068 882,571 (643,503) Improvement Bonds of 2003B 86,724 41,873 128,597 129,745 258,342 204,903 53,439 Improvement Bonds of 2004A 311,056 217,589 528,645 1,511,874 2,040,519 1,396,532 643,987 Improvement Bonds of 2005A 1,069 5,370,475 5,371,544 6,848,539 12,220,083 6,935,546 5,284,537 Refunding Imp. Bonds of 2005B 513,132 314,854 827,986 3,094,482 3,922,468 3,430,470 491,998 $ 2,167,969 $ 6,599,048 $ 8,767,017 $ 11,614,612 $ 20,381,629 $ 14,356,280 $ 6,025,349 Note: Deferred revenue in the above table does not include the future scheduled "interest portion" of the adopted assessment rolls. The 2004A Improvement Bonds also include a pledge from the Area and Unit Fund that has not been included above. (3) Honorable Mayor and Members of the City Council City of Lino Lakes The above table provides a means for monitoring the status of the debt service funds. For the General Debt funded solely by property taxes, it appears that there are adequate planned levies to retire the debt when the future lease revenues scheduled to be received from the school district are included. While in total the City has a surplus of total resources available over remaining scheduled debt service based on the calculation above, certain individual funds are operating at a deficit. These deficits will need to be funded by future adopted assessment rolls, special assessment levies, investment earnings, transfers from other funds, property taxes or other available means. Factors to consider when analyzing debt service funds: Are all the anticipated assessment rolls being adopted as soon as appropriate? Have all the planned financing sources been identified, such as pledged amounts from the area and unit fund or future MSA funds? Are there significant "prepayments" received from property owners? In the current investment environment, will the earnings the City will receive on these prepayments be lower than the interest rate that was being charged on the adopted assessment roll? The Area and Unit Fund is committed to the debt service of some special assessment bonds as well as toward the water revenue bonds. The City's five-year operating plan addresses the above issues and therefore, this comment is simply a reminder of the extent that repayment of certain debt is based on pledged sources from the Area and Unit fund. Cash Receipts During our audit, we performed walk throughs on the park and recreation cash receipting process. It was noted during our procedures that there is not a review process in place for credits applied to customers accounts. To provide proper control over the credit application process, we recommend an individual from outside the department review credits applied to individual customer accounts for reasonableness. Information Technoloay Software Administration — We noted that access to the server is authenticated via a generic admin user ID and password. Best practices advise the City to implement complex passwords for the server hosting the general ledger system. At a minimum, passwords should be 8 characters, alphanumeric, and expiring at a minimum of every 90 days. Physical Security — We noted that the server room is not temperature controlled. We therefore recommend that the City consider installing environmental controls to adequately safeguard network infrastructure from excessive heat, cold, dust, etc Disaster Recovery Plan — We noted that the City has not established a formal, written business continuity or disaster recovery plan to be used in the event of a disaster. We therefore recommend the City develop a written plan to support the recovery of the technical infrastructure that can be used for testing and training purposes. In addition, the plan should be constructed in a format that could be followed by individuals not familiar with City operations in the event "key" information technology personnel are affected by the disaster event and are not available to execute recovery activities. (4) Honorable Mayor and Members of the City Council City of Lino Lakes Inventory Capital Assets The City has a significant investment in equipment, and we recommend that controls be strengthened in this area. Most capital assets are not physically inventoried, counted or verified. We recommend that periodic physical counts of property, especially removable equipment items, be taken and compared to the detailed capital asset subsidiary ledger. Affixing identifying tags with numbers as assigned in the subsidiary ledger will aid in making this comparison. The added controls will do the following: • Assist in planning for capital expenditures. • Assist determining accurate amounts and values of insurable assets. • Assist detecting the loss or unauthorized use of assets. During the audit it was also noted that although an accountant prepares a monthly reconciliation of capital outlay, construction in process and capital assets, the reconciliation is not reviewed. To improve segregation of duties we recommend review and approval of the monthly reconciliation by someone other than the preparer who has knowledge of capital asset activity. Conclusion We welcome the opportunity to discuss the points mentioned in this letter or any other accounting and procedural issues in order to coordinate our efforts with you, the mutual objective being the development of more effective accounting procedures for the City. We understand that some of the aforementioned points are in the process of implementation or may already have been implemented; however, these points are noted so that effective follow-up can be accomplished. We sincerely appreciate all the courtesies and cooperation extended to us by you and the staff of the City, and thank you for the opportunity to be of service to you. We look forward to working with you in the future. This report is intended solely for the information and use of the City Council, finance committee, management, the Office of the State Auditor, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Minneapolis, Minnesota May 26, 2009 (5) LarsonAllen LLP , LarsenAllen" LLP CPAs, Consultants & Advisors www.larsonallen.com REPORT ON MINNESOTA LEGAL COMPLIANCE Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota 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 Lino Lakes, Minnesota as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 26, 2009. We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards applicable to financial audits contained in Governmental Auditing standards, issued by the Comptroller General of the United States, and the provisions of the Minnesota Legal Compliance Audit Guide for Local Govemment, promulgated by the State Auditor pursuant to Minnesota Statute 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that, with respect to the items tested, the City of Lino Lakes, Minnesota complied with the material terms and conditions of applicable legal provisions, except as noted in the schedule of findings. This report is intended solely for the use of the City of Lino Lakes, Minnesota, the Office of the State Auditor, and other state agencies, and is not intended to be and should not be used by anyone other than these specified parties. V_04�0_._VA20w-JOV0101, LarsonAllen LLP Minneapolis, Minnesota May 26, 2009 6) I® � . LarsonAllen LLP is a member of Nexia Internati O, a worldwide network of independent accounting and consulting firms. INTERNATIONAL CITY OF LINO LAKES SCHEDULE OF FINDINGS YEAR ENDED DECEMBER 31, 2008 Finding: 2008-01 Contracting and Bidding Finding: Minnesota statutes require that all contracts greater than $75,000 obtain a performance bond and bid bond in the amount of the contract. During our testing, we noted one contract that did not have a performance bond and bid bond. Corrective Action Plan: The City will require all contracts greater than $75,000 to have a performance bond and bid bond in the amount of the contract in the future. LarsenAllen' LLP CPAs, Consultants & Advisors www.larsonallen.com OTHER REQUIRED AUDITOR COMMUNICATIONS Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota 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 Lino Lakes, Minnesota for the year ended December 31, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 26, 2009. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter date November 12, 2008, our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City of Lino Lakes. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City of Lino Lake's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. 1. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. 2. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. 3. We are also responsible for communicating matters regarding the provisions of the Minnesota Legal Compliance Audit Guide for Local Government, promulgated by the State Auditor pursuant Minnesota Statute 6.65. s) I® • . LarsonAllen LLP is a member of Nexia Internati T a7, a worldwide network of independent accounting and consulting firms. INTERNATIONAL Honorable Mayor and Members of the City Council City of Lino Lakes Other Information in Documents Containing Audited Financial Statements Our audit opinion, the audited financial statements, and the notes to financial statements should only be used in their entirety. Inclusion of the audited financial statements in a client prepared document, such as an annual report, should be done only with our prior approval and review of the document. Our responsibility for other information in documents containing the entity's financial statements and report does not extend beyond the financial information identified in the report. We do not have an obligation to perform any procedures to corroborate other information contained in such documents. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on January 22, 2009. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City of Lino Lakes are described in Note 1 to the financial statements. The City adopted Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which was effective for the year ended December 31, 2008. Accordingly, the accounting change for other postemployment benefits has been applied prospectively beginning in 2008, as permitted by GASB Statement No. 45. The City also adopted GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, and GASB Statement No. 50, Pension Disclosures -an Amendment of GASB Statements No. 25 and No. 27. The adoption of GASB Statements No. 49 and No. 50 did not have a significant impact on the City's financial statements. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Estimated useful lives of depreciable capital assets - Management's estimate of useful lives for depreciable assets is based on guidance recommended by authoritative accounting literature and past experiences. The useful life of a depreciable asset determines the amount of depreciation that will be recorded in any given reporting period as well as the amount of accumulated depreciation that is reported at the end of a reporting period. Estimated year-end valuation of investments at fair value — Management's estimate of the fair value of investments is based on published market values at December 31, 2008. Estimated current portion of compensated absences payable — Management's estimate of the amount of the year-end compensated absences payable balance to be taken by employees is based on historical trends and anticipated leave time activity. (9) Honorable Mayor and Members of the City Council City of Lino Lakes We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. The disclosures in the financial statements are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely adjustments identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. The attached schedule summarizes unrecorded adjustments of the financial statements. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditors' report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated May 26, 2009. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the City's financial statements or a determination of the type of auditors' opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. (10) Honorable Mayor and Members of the City Council City of Lino Lakes This report is intended solely for the use of the City Council, finance committee, and management of the City of Lino Lakes and is not intended to be, and should not be used by anyone other than these specified parties. LarsonAllen LLP Minneapolis, Minnesota May 26, 2009 CITY OF LINO LAKES SUMMARY OF PASSED ADJUSTMENTS DECEMBER 31, 2008 Description Debit Inventory Expense (To record inventory that is not booked) $ 55,446 Credit 55,446 Water Fund New Accounting and Reporting Standards Accounting and Financial Reporting for Intangible Assets (GASB Statement No. 51) This statement is effective for periods beginning after June 15, 2009 and, therefore, is applicable to the City for the year ended December 31, 2010. The purpose of this statement is to eliminate the inconsistencies in accounting and reporting between governmental entities related to intangible items such as easements, rights, patents, trademarks, software, and donated assets. Fund Balance Reporting Changes (GASB Statement No. 54) In March 2009, the Governmental Accounting Standards Board GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The requirements of this Statement are effective for the fiscal year ending December 31, 2011. Earlier adoption and implementation is encouraged. Statement No. 54 distinguishes between fund balance amounts that are considered non -spendable, such as fund balance associated with inventories, and other amounts that are classified based on the relative ability to be spent. Beginning with the most non -spendable classification, fund balances will be reported in the following classifications: • Restricted—amounts constrained by external parties, constitutional provision, or enabling legislation. • Committed -includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority • Assigned—amounts a government intends to use for a particular purpose. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. • Unassigned—amounts that are not constrained at all will be reported in the general fund or to report deficit balances in other governmental funds. The new standard also clarifies the definitions of individual governmental fund types. The statement interprets certain terms within the definition of special revenue fund types, while further clarifying the debt service and capital projects fund type definitions. The statement also specifies how economic stabilization or "rainy -day" amounts should be reported as a component of fund balance in the general fund. Under GASB No. 54, it is no longer considered appropriate to include these types of funds as a special -revenue fund. For financial reporting purposes, stabilization should be regarded as a "restricted" or "committed" classification only if the city details the circumstances or conditions that signal the need for stabilization in sufficient detail. Otherwise, these amounts should be reported as "unassigned" in the general fund. (13) This page left intentionally blank.