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Home My WebLink AboutVLAWMO Annual Financial Report 2002VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION ANNUAL FINANCIAL REPORT December 31, 2002 - This page intentionally left blank - VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION TABLE OF CONTENTS Organization Independent Auditor's Report Introductory Section Financial Statements General Purpose Financial Statements: Combined Balance Sheet - All Fund Types and Account Groups Combined Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund Notes to Financial Statements Other Reports Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report on Compliance With Minnesota Legal Compliance Audit Guide For Local Government Ref No. Page No. 3 5 Statement 1 10 Statement 2 11 13 23 27 1 - This page intentionally Deft blank - 1 1 1 1 1 1 1 1 1 1 1 1 1 t E E t E INTRODUCTORY SECTION 1 - This page intentionally left blank - 1 1 l l 2 1 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION ORGANIZATION December 31, 2002 Name Board of Commissioners: Mark Burch Dan Colton Steve Haselmann Rocky Keehn Roger Ramthun Paul Emeott Dick Sand L L Position Chair Person Vice Chairperson Secretary/Treasurer Member Member Member Member Governmental Unit City of White Bear Lake City of North Oaks St. Paul Regional Water Services City of Lino Lakes City of Vadnais Heights City of Gem Lake White Bear Township 3 1 - This page intentionally left blank - 1 1 1 1 1 1 1 1 1 1 1 1 4 HLB Tautges Redpath, Ltd. Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT To the Board of Commissioners Vadnais Lake Area Water Management Organization White Bear Lake, Minnesota We have audited the accompanying general purpose financial statements of the Vadnais Lake Area Water Management Organization as of and for the year ended December 31, 2002, as listed in the table of contents. These general purpose fmancial statements are the responsibility of the Vadnais Lake Area Water Management Organization's management. Our responsibility is to express an opinion on these general purpose 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 general purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general purpose fmancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the general purpose fmancial statements referred to above present fairly, in all material respects, the fmancial position of the Vadnais Lake Area Water Management Organization as of December 31, 2002, and results of its operations 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 a report dated July 24, 2003 on our consideration of the Vadnais Lake Area Water Management Organization's internal control over fmancial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. White Bear Lake Office: 4810 White Bear Parkway, White Bear Lake, MN 55110, USA Telephone: 651 426 7000 Fax: 651 426 5004 Hastings Office:1303 South Frontage Road, Suite 13, Hastings, MN 55033, USA Telephone: 651 480 4990 Fax: 651 426 5004 HLB Tautges Redpath, Ltd. is a member of IILB International. A world-wide organization of accounting firms and business advisors. 5 1 - This page intentionally left blank - 6 i r 1 1 1 1 1 1 1 1 1 1 , 1 1 1 Our audit was performed for the purpose of forming an opinion on the general purpose financial statements taken as a whole. The combining, individual fund and account group financial statements listed in the table of contents are presented for purposes of additional analysis and are not a required part of the general purpose fmancial statements of the Vadnais Lake Area Water Management Organization. Such information has been subjected to the auditing procedures applied in the audit of the general purpose financial statements and, in our opinion, is fairly stated in all material respects, in relation to the general purpose fmancial statements taken as a whole. July 24, 2003 Y68 �-4 ilf4at HLB TAUTGES REDPATH, LTD. Certified Public Accountants L - This page intentionally left blank - 1 1 1 1 1 1 1 1 1 FINANCIAL STATEMENTS 9 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION COMBINED BALANCE SHEET ALL FUND TYPES AND ACCOUNT GROUPS December 31, 2002 Statement l Governmental Fund Type Account Group Totals General (Memorandum Only) General Fixed Assets 2002 2001 Assets Cash $153,212 Due from other governments 30,234 General fixed assets - Total assets $183,446 Liabilities and Fund Equity 5,915 $153,212 $102,079 30,234 4,233 5,915 5,915 $5,915 $189,361 $112,227 Liabilities: Accounts payable $3,324 $ - $3,324 $ - Due to other governments 33,530 - 33,530 33,049 Deposits payable 18,774 - 18,774 30,115 Total liabilities 55,628 0 55,628 63,164 Fund equity: Investment in general fixed assets Fund balance: Unreserved: Undesignated Total fund equity 127,818 127,818 5,915 5,915 5,915 127,818 43,148 5,915 133,733 49,063 Total liabilities and fund equity $183,446 $5,915 $189,361 $112,227 The accompanying notes are an integral part of these financial statements. 10 L L L i L VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION COMBINED STATEMENT OF REVENUE, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL GENERAL FUND For The Year Ended December 31, 2002 Statement 2 2002 Over (Under) Budget Actual Budget 2001 Actual Revenue: Intergovernmental: Member assessments $46,900 $46,900 $ - $46,380 Grants 4,000 102,036 98,036 9,228 Charges for services 1,000 600 (400) 480 Investment income 1,300 920 (380) 2,164 Other revenue 500 623 123 428 Total revenue 53,700 151,079 97,379 58,680 Expenditures: Salaries 50,920 42,272 (8,648) 41,501 Payroll processing 560 547 (13) 559 Office expenses 3,000 2,530 (470) 2,394 Technical consulting 800 744 (56) 785 Audit 2,000 (2,000) 2,000 Insurance 2,500 2,590 90 2,342 Training 700 803 103 155 Legal 500 139 (361) 435 Information systems 2,000 600 (1,400) 892 Education 300 85 (215) 900 Projects 600 14,799 14,199 9,977 Miscellaneous 1,000 1,300 300 1,252 Total expenditures 64,880 66,409 1,529 63,192 Revenue over (under) expenditures ($11,180) 84,670 $95,850 (4,512) Fund balance - January 1 43,148 47,660 Fund balance - December 31 $127,818 $43,148 The accompanying notes are an integral part of these financial statements. 11 1 - This page intentionally left blank - 1 F a 1 r 1 1 'i 1 1 1 t 1 1 1 12 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Vadnais Lake Area Water Management Organization conform to generally accepted accounting principles as applied to governmental units by the Governmental Accounting Standards Board (GASB). The following is a summary of significant accounting policies. A. FINANCIAL REPORTING ENTITY The Vadnais Lake Area Water Management Organization was created in the exercise of joining powers to meet the requirements of the Metropolitan Surface Water Management Act, re -codified as Minnesota Statutes chapters 103B and 103D. Its general purpose is to establish an organization to jointly and cooperatively develop a water management plan and program to (1) protect, preserve, and use natural surface and groundwater storage and retention systems; (2) minimize capital expenditures necessary to correct flooding and water quality problems; (3) identify and plan for means to effectively protect and improve surface and groundwater quality; (4) establish more uniform local policies and official controls for surface water, wetland, and groundwater management; (5) prevent erosion of soil into surface water systems; (6) promote groundwater recharge; (7) protect and enhance fish and wildlife habitat and water recreational facilities, and secure other benefits associated with the proper management of surface ground water, and be in accordance with the Act. The Organization is governed by a Board of Commissioners which consists of seven members, one from each of the following participating governmental units: City of North Oaks City of White Bear Lake St. Paul Regional Water Services City of Lino Lakes White Bear Township City of Vadnais Heights City of Gem Lake All property of the Organization is owned by the members entities in proportion to the total contribution of each participating governmental unit as required by the previous annual budget. The accounting policies of the Organization conform to generally accepted accounting principles as applicable to governmental units. Component units are legally separate entities for which the Organisation (primary government) is financially accountable, or for which the exclusion of the component unit would render the financial statements of the primary government misleading. The criteria used to determine if the primary government is financially accountable for a component unit include whether or not the primary government appoints the voting majority of the potential component unit's governing body, is able to impose its will on the potential component unit, is in a relationship of financial benefit or burden with the potential component unit, or is fiscally depended upon by the potential component unit. VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 Based on these criteria, there are no organizations considered to be component units of the Organization. B. FUND ACCOUNTING The accounting system of the Organization is organized and operated on the basis of funds and account groups. A fund is defined as a fiscal and accounting entity with a self -balancing set of accounts recording cash and other fmancial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The following types of funds and account groups are employed by the Organization: GOVERNMENTAL FUNDS: General Fund is the general operating fund of the Organization. It is used to account for fmancial resources to be used for general administrative expenses and for the construction and maintenance of projects of common benefit to the Organization. ACCOUNT GROUPS: The governmental fund types are designed to account for the financial flow of a particular fund; therefore, they generally include only current assets and current liabilities on their balance sheets. The Organization maintains one account group to account for noncurrent assets as follows: General Fixed Assets — This account group contains the fixed assets used in the governmental fund type operations. They are assets of the Organization as a whole and not of individual funds. C. BASIS OF ACCOUNTING The modified accrual basis of accounting is followed by the Organization for its governmental funds. Under this method of accounting, revenues are recognized when they become susceptible to accrual; that is, when they become both measurable and available to finance expenditures of the fiscal period. Also, under this method, expenditures are recognized in the accounting period when the liability is incurred, except for disbursements for inventory -type items and prepaid expenses which are considered expenditures at the time of purchase. 14 L L VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 Major revenue sources susceptible to accrual include intergovernmental revenues, charges for services and investment income. No interest has been accrued on investments since the amount is deemed by management to be immaterial. Miscellaneous revenue sources not susceptible to accrual are recorded as revenue when received because they are not measurable until collected. D. BUDGETS AND BUDGETARY ACCOUNTING The Board of Commissioners adopts a budget for the general government operations of the Organization on an annual basis. During the budget year, supplemental appropriations and deletions are or may be authorized by the Board. The amounts shown in the fmancial statements as "Budgeted" represent the original budgeted amounts plus all revisions made during the year and/or for the year. The modified accrual basis of accounting is used by the Organization for budgeting data. All appropriations end with the fiscal year for which they were made. The Organization monitors budget performance and all amounts over budget have been approved by the Board through the disbursement approval process. The Organization prepares a revenue and expenditure budget for its General Fund. Encumbrance accounting, under which purchase orders, contracts, and other commitments of monies are recorded in order to reserve that portion of the applicable appropriation, is not employed by the Organization. E. INVENTORIES The original cost of materials and supplies has been recorded as expenditures at the time of purchase. The Organization does not maintain significant amounts of inventories of materials and supplies. F. "MEMORANDUM ONLY" PRESENTATIONS Total cohimns on the General Purpose Financial Statements are captioned "Memorandum Only" to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations in conformity with generally accepted accounting principles. Neither are such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data. G. USE OF ESTIMATES The preparation of fmancial statements in accordance with generally accepted accounting principles (GAAP) requires management to make estimates that affect amounts reported in the fmancial statements during the reporting period. Actual results could differ from such estimates. 15 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 H. COMPENSATED ABSENCES Vested or accumulated vacation leave and other benefit amounts that are expected to be liquidated with expendable available financial resources are reported as an expenditure and a fund liability of the governmental fund that will pay it. No expenditure is reported for these amounts. At December 31, 2002, the amount of accumulated vacation leave was immaterial to the financial statements and is not reported. I. FIXED ASSETS General fixed assets are recorded as expenditures of the Governmental Funds at the time of purchase. Such assets are capitalized at historical cost or estimated historical cost in the General Fixed Asset Account Group. Public Domain ("infrastructure") general fixed assets consisting of roads, bridges, curbs, gutters, streets, sidewalks, and drainage systems are excluded from general fixed assets as these assets are immovable and of value only to the Organization. No depreciation has been provided on general fixed assets. Note 2 DEPOSITS AND INVESTMENTS DEPOSITS In accordance with Minnesota Statutes, the Organization maintains deposits at those depository institutions authorized by the Board of Commissioners. Minnesota Statutes require that all Organization deposits be protected by insurance, surety bond or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or bonds (140% in the case of mortgage notes pledged). Authorized collateral includes the legal investments described below, as well as certain first mortgage notes, and certain other state or local government obligations. Minnesota Statutes require that securities pledged as collateral be held in safekeeping by the Organization treasurer or in a financial institution other than that furnishing the collateral. In accordance with the provisions of GASB No. 31, the Organization reports investments at fair value in the financial statements. Also in accordance with the provisions of GASB No. 31, the Organization has reported all investment income, including changes in fair value of investments, as revenue to the operating statements. At year end the carrying amount of the Organization's deposits was $153,212 and the bank balance was $153,237. Minnesota Statutes require that all of the Organisation's deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or bonds (140% in the case of mortgage notes pledged). At December 31, 2002, the Organisation's deposits were entirely insured by the FDIC. 16 L VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 INVESTMENTS Minnesota Statutes authorize the Organization to invest in the following: a) Direct obligations or obligations guaranteed by the United States or its agencies, its instrumentalities or organizations created by an act of Congress, excluding mortgage -backed securities defined as high risk. b) Shares of investment companies registered under the Federal Investment Company Act of 1940 and whose only investments are in securities described in (a) above. c) General obligations of the State of Minnesota or any of its municipalities. d) Bankers acceptance of United States banks eligible for purchase by the Federal Reserve System. e) Commercial paper issued by United States corporations or their Canadian subsidiaries, of the highest quality, and maturing in 270 days or less. f) Repurchase or reverse repurchase agreements with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000; a primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York; certain Minnesota securities broker -dealers; or, a bank qualified as a depository. The Organization did not invest in any of the above listed investments during 2002. Note 3 CHANGES IN GENERAL FIXED ASSETS A statement of changes in general fixed assets is as follows: Balance Balance Beginning End of Year Additions Deletions of Year Equipment $5,915 $ - $ - $5,915 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 Note 4 RELATED PARTY TRANSACTIONS REVENUE The Organization assesses each member entity on a yearly basis to provide funds to operate the Organization's business. Revenue from assessments to members in 2002 is as follows: 2002 Revenue City of North Oaks $13,790 City of White Bear Lake 10,560 St. Paul Regional Water Services 1,589 City of Lino Lakes 1,423 White Bear Township 5,354 City of Vadnais Heights 12,853 City of Gem Lake 1,331 Total $46,900 Note 5 DEFINED BENEFIT PENSION PLANS - STATEWIDE A. PLAN DESCRIPTION All full-time and certain part-time employees of the Organization are covered by defined benefit plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA administers the Public Employees Retirement Fund (PERF) which is cost -sharing, multiple -employer retirement plan. This plan is established and administered in accordance with Minnesota Statute, Chapters 353 and 356. PERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new members must participate in the Coordinated Plan. PERA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by State Statute, and vest after three years of credited service. The defined retirement benefits are based on a member's highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. The benefit provisions stated in the previous paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. 18 VADNAIS LAKE AREA WATER MANAGEMENT ORGANIZATION NOTES TO FINANCIAL STATEMENTS December 31, 2002 PERA issues a publicly available financial report that includes financial statements and required supplementary information for PERF. That report may be obtained by writing to PERA, 60 Empire Drive #200, St. Paul, Minnesota, 55103-2088 or by calling (651)296-7460 or 1-800-652-9026. B. FUNDING POLICY Minnesota Statutes Chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the state legislature. The Organisation makes annual contributions to the pension plans equal to the amount required by state statutes. PERF Basic Plan members and Coordinated Plan members are required to contribute 9.10% and 5.10%, respectively, of their annual covered salary. The Organization is required to contribute the following percentages of annual covered payroll: 11.78% for Basic Plan PERF members and 5.53% for Coordinated Plan PERF members. The Organi7ation's contributions for the years ending December 30, 2002, 2001 and 2000 were $2,056, $1,814, and $1,682, respectively. Note 6 EXCESS OF EXPENDITURES OVER APPROPRIATIONS IN INDIVIDUAL FUNDS For the year ended December 31, 2002, there were excess expenditures over appropriations in the General Fund as follows: Over Budget Actual Budget General fund: $64,880 $66,409 $1,529 Note 7 RISK MANAGEMENT The organisation is exposed to various risks of loss related to torts, theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. Property and casualty and worker's compensation liabilities are insured. The Organization retains risk for the deductible portions of the insurance. The amounts of these deductibles are considered immaterial to the general purposed financial statements. There were no significant reductions in insurance from the previous year or settlements in excess of insurance coverage for any of the past three fiscal years. 19 - This page intentionally left blank - 1 i T 9 lle OTHER REPORTS 21 1 l - This page intentionally left blank - 22 HLB Tautges Redpath, Ltd. Certified Public Accountants and Consultants Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Commissioners Vadnais Lake Area Water Management Organization White Bear Lake, Minnesota We have audited the general purpose fmancial statements of the Vadnais Lake Area Water Management Organization as of and for the year ended December 31, 2002, and have issued our report thereon dated July 24, 2003. 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. Compliance As part of obtaining reasonable assurance about whether the Vadnais Lake Area Water Management Organization's general purpose financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of general purpose 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 that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Vadnais Lake Area Water Mangement Organization's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the general purpose financial statements and not to provide assurance on the internal control over fmancial reporting. However, we noted certain matters involving the internal control over fmancial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the Vadnais Lake Area Water Mangement Organization's ability to record, process, summarize, and report fmancial data consistent with the assertions of management in the general purpose financial statements. Reportable conditions are as follows: White Bear Lake Ofce: 4810 White Bear Parkway, White Bear Lake, MN 55110, USA Telephone: 651 426 7000 Fax: 651 426 5004 Hastings Office:1303 South Frontage Road, Suite 13, Hastings, MN 55033, USA Telephone: 651 480 4990 Fax: 651 426 5004 HLB Tautges Redpath, Ltd. is a member of IILB International. A world-wide organization of accounting firms and business advisors. 23 - This page intentionally left bleak - 1 1 1 1 1 1 1 1 1 1 I 1 1 1 1 1 1 24 L Independent Auditor's Report on Compliance and on Internal Control Page 2 Segregation of Duties Our audit disclosed that substantially all accounting procedures are performed by a single employee. Ideal conditions call for segregation of duties to establish a system of internal testing of procedures performed. It is a common practice in organizations of this size to have a substantial portion of certain accounting processes performed by a single employee. The Organization has established certain other safeguards to compensate for this situation, such as Board approval of all disbursements, Board review of interim financial data compared to budget, two signatures required on all checks, etc. Any modification of internal controls in these areas must be viewed from a cost/benefit perspective. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the general purpose financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we believe that none of the reportable conditions described above is a material weakness. This report is intended solely for the information and use of the Vadnais Lake Area Water Management Organization and is not intended to be and should not be used by anyone other than those specified parties. July 24, 2003 flateei HLB TAUTGES REDPATH, LTD. Certified Public Accountants - This page intentionally left blank - 1 I M 1 1 1 1 1 26 R HLB Tautges Redpath, Ltd. Certified Public Accountants and Consultants Independent Auditor's Report on Compliance With Minnesota Legal Compliance Audit Guide For Local Government To the Board of Commissioners Vadnais Lake Area Water Management Organization White Bear Lake, Minnesota We have audited the general purpose financial statements of the Vadnais Lake Area Water Management Organization, as of and for the year ended December 31, 2002 and have issued our report thereon dated July 24, 2003. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the Minnesota Legal Compliance Audit Guide for Local Government promulgated by the Legal Compliance Task Force pursuant to Minnesota Statutes Section 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 five main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, and, claims and disbursements. Our study included all of the listed categories. The results of our tests indicate that for the items tested, the Vadnais Lake Area Water Management Organization complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the information and use of the Vadnais Lake Area Water Management Organizationand management and is not intended to be and should not be used by anyone other than these specified parties. July 24, 2003 I kg Aligt/ HLB TAUTGES REDPATH, LTD. Certified Public Accountants White Bear Lake Office: 4810 White Bear Parkway, White Bear Lake, MN 55110, USA Telephone: 651 426 7000 Fax: 651 426 5004 Hastings Office:1303 South Frontage Road, Suite 13, Hastings, MN 55033, USA Telephone: 651 480 4990 Fax: 651 426 5004 HLB Tautges fledpath, Ltd. is a member of f lntemational. A world-wide organization of accounting firms and business advisors. 27 - This page intentionally left blank - 28 VLAWMO Al Roleck Director of Finance City of Lino Lakes 600 Town Center Parkway Lino Lakes, MN 55014 August 26, 2003 Dear Mr. Roleck: Members Gem Lake Lino Lakes North Oaks St. Paul Regional Water Service Vadnais Heights White Bear Lake White Bear Township The Vadnais Lake Area Water Management Organization (VLAWMO) in order to provide clear reporting to our member communities and to comply with Minnesota Statute 103B.231, has conducted an independent audit of it's financial records for fiscal years 2001 and 2002. The financial report and a management letter are furnished for your information. Please contact the VLAWMO office with questions or comments, 651-429-8522 or office@vlawmo.org. Sincerely, Steve Haselmann Secretary / Treasurer rezemsa...) ossei-741-7-tmt.t.A. Stephanie McNamara Administration / Wetland Specialist 4701 Highway 61, White Bear Lake, MN 55110; 651-429-8522, Fax: 651-429-8500 website: www.vlawmo.orq; email: office@vlawmo.org HLB Tautges Redpath, Ltd. Certified Public Accountants and Consultants To the Board of Commissioners of the Vadnais Lake Area Water Management Organization White Bear Lake, Minnesota We have completed our financial audits of the Vadnais Lake Area Water Management Organization for the years ended December 31, 2001 and 2002. In conjunction therewith, we are communicating certain management information relevant to municipal finances in Minnesota and new accounting standards that will affect Water Management Organizations. MANAGEMENT INFORMATION New Fraud Standard — SAS 99 Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, has been issued and will be required for audits of periods beginning on or after December 15, 2002. SAS 99 does not change the auditor's responsibility to obtain reasonable assurance that the financial statements are free of material misstatement, including material misstatement due to fraud. The reason the new SAS was issued was to increase the likelihood that the auditor will detect material misstatement in the financial statements due to fraud by increasing the amount and nature of required procedures. White Bear Lake Office: 4810 White Bear Parkway, White Bear Lake, MN 55110, USA Telephone: 651 426 7000 Fax: 651 426 5004 Hastings Ofce:1303 South Frontage Road, Suite 13, Hastings, MN 55033, USA Telephone: 651 480 4990 Fax: 651 426 5004 HLB Tautges Redpath, Ltd. is a member of tiro International. A world-wide organization of accounting firms and business advisors. Vadnais Lake Area Water Management Organization Management Information SAS 99 is a comprehensive, far-reaching audit standard which is expected to significantly change the way auditor's approach and perform audits. The bottom line is that SAS 99 expects auditors to perform more work in every audit in both identifying and responding to the risk of material misstatement due to fraud. Implementation of SAS 99 will require additional time to complete an audit. For the Organization, SAS 99 will be required for the audit of the year ending December 31, 2003. An overview of SAS 99 is as follows: Information Gathering Phase: • A required brainstorming session among the audit team members to discuss the potential for material misstatement due to fraud. • An increased emphasis on inquiry as an audit procedure that increases the likelihood of fraud detection. o Required management inquiries, many of which are new. o Required inquiries of "others" within the entity (i.e., non -accounting personnel). • Expanded use of analytical procedures to gather information used to identify risks of the material misstatement due to fraud. • The consideration of other information, such as client acceptance and continuance procedures, during the information -gathering phase. 2 Vadnais Lake Area Water Management Organization Management Information Identifying and Assessing Fraud Risks • Required to presume that improper revenue recognition is a fraud risk. • Required tests in response to the risk of management override of controls. o Examining journal entries and other adjustments. o Retrospective review of accounting estimates. o Business rationale for significant unusual transactions. Responding to Assessed Risks: • Assignment of personnel and supervision should be commensurate with the auditor's assessment of the risks of material misstatement due to fraud. • The auditor should consider management's selection and application of significant accounting principles. • Auditors are required to incorporate an element of unpredictability in audit procedures from year to year. Evaluating Audit Evidence • Assessing risks of material misstatement due to fraud throughout the audit. • Evaluating whether analytical procedures performed as substantive tests or in the overall review stage of the audit indicate a previously unrecognized risk of material misstatement due to fraud. • Evaluating the risks of material misstatement due to fraud at or near the completion of fieldwork. • Responding to misstatements that may be the result of fraud. 3 Vadnais Lake Area Water Management Organization Management Information Required Auditor Documentation • The discussion among engagement personnel in planning the audit regarding the susceptibility of the entity's financial statements to material misstatement due to fraud, including how and when the discussion occurred, the audit team members who participated, and the subject matter discussed. • The procedures performed to obtain information necessary to identify and assess the risks of material misstatement due to fraud. • Specific risks of material misstatement due to fraud that were identified, and a description of the auditor's response to those risks. • If the auditor has not identified in a particular circumstance, improper revenue recognition as a risk of material misstatement due to fraud, the reasons supporting the auditor's conclusion. • The results of the procedures performed to further address the risk of management override of controls. • Other conditions and analytical relationships that caused the auditor to believe that additional auditing procedures or other responses were required and any further responses the auditor concluded were appropriate, to address such risks or other conditions. • The nature of the communications about fraud made to management, the audit committee, and others. 4 Vadnais Lake Area Water Management Organization Management Information SAS 61 — Communication with Audit Committees Statement of Auditing Standards No. 61, "Communication With Audit Committees," requires the auditor to ensure that certain matters related to the conduct of an audit are communicated to those who have responsibility for oversight of the financial reporting process. The Vadnais Lake Area Water Management Organisation does not have a formal audit committee. As such, we are communicating these matters to those who have oversight responsibility for the fmancial reporting process. The following constitutes our communication of such matters. The Auditor's Responsibility under Auditing Standards Generally Accepted in the United States of America Our audit, conducted in accordance with auditing standards generally accepted in the United States of America, is designed to provide reasonable, but not absolute, assurance about whether the fmancial statements are free of material misstatement. These financial statements are the responsibility of management and it is our responsibility to express an opinion on these financial statements based on our audit results. Significant Accounting Policies There were no changes in significant accounting policies or their application during the year audited. 5 Vadnais Lake Area Water Management Organization Management Information Significant Audit Adjustments Our audit of the 2001 and 2002 fmancial statements resulted in no audit adjustments which we considered significant enough to be recorded by the Vadnais Lake Area Water Management Organization to prevent the financial statements from being misleading. All audit adjustments posted have been communicated to and approved by the Vadnais Lake Area Water Management Organization management. Other Items Statement on Auditing Standards No. 61 also requires communications to the committee in the following areas: • Accounting estimates and management judgments • Other information in documents containing audited financial statements • Disagreements with management • Consultations with other accountants • Major issues discussed with management • Difficulties encountered in performing the audit During our audit, we did not encounter any circumstances and we are unaware of any items in any of these areas which require discussion with those who have responsibility for oversight of the financial reporting process. 6 Vadnais Lake Area Water Management Organization Management Information GASB 34 — The Reporting Model In June, 1999, GASB issued Statement No. 34, Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments. The statement is the most comprehensive governmental accounting rule ever developed. The new standard will significantly change the way state and local governments report their financial activity to the public. In general, the new standards make government fmancial reporting more like the private sector. To understand the impact of the new statement, it is helpful to highlight the current differences between private sector and government financial reporting: • Governmental reporting focuses on groupings of various funds that segregate resources for specific activities. In the private sector, even the most complex business is presented as a single reporting entity; • The private sector's fmancial reporting focuses on earnings and changes in total business resources, including long-term assets and liabilities. This contrasts to government's more short-term focus on current resources available for appropriation and spending; and, • The budget functions more as a financial plan in the private sector; whereas in government, the budget is more important in demonstrating compliance by comparing actual financial results to the budget. 7 Vadnais Lake Area Water Management Organization Management Information The most significant changes Although the new GASB requirements are numerous, the major changes include: • Reporting on the major individual funds as opposed to the aggregation of fund groups; • Comparison of actual fmancial results to both the original and amended budgets; • Requiring infrastructure reporting and additional "government -wide" financial statements on the accrual basis of accounting. This means the "checkbook" basis of accounting at the fund level would remain alongside the new and different entity -wide statements, which would include long-term assets and liabilities, and, • Requiring a narrative analysis of the government's financial activities (MD&A letter). Three phases of implementation dates The implementation dates are effective in three phases based on a government's annual revenues in the first fiscal year ending after June 15, 1999, as follows: • Phase 1. Governments with total annual revenues (excluding extraordinary items) of $100 million or more should apply this statement for periods beginning after June 15, 2001. • Phase 2. Governments with total annual revenues of at least $10 million, but less than $100 million, should apply this statement for periods beginning after June 15, 2002. • Phase 3. Governments with less than $10 million in revenues should apply this statement for periods beginning after June 15, 2003. The Organization is a Phase 3 government and will be required to implement GASB 34 for the year ending December 31, 2004. 8 Vadnais Lake Area Water Management Organization Management Information Legal Compliance Requirements for Contracts and Bidding Minnesota Statute 471.345, Uniform Municipal Contracting Law, explains the bidding requirements for municipalities. When interpreting the statute, the Vadnais Lake Area Water Management Organization is considered to have a population of less than 2,500. Subdivisions 1-5, which are most applicable with the Organization, are as follows: Subdivision 1. Municipality defined. For purposes of this section, "municipality" means a county, town, city, school district or other municipal corporation or political subdivision of the state authorized by law to enter into contracts. Subd. 2. Contract defined. A "contract" means an agreement entered into by a municipality for the sale or purchase of supplies, materials, equipment or the rental thereof, or the construction, alteration, repair or maintenance of real or personal property. Subd. 3. Contracts over $35,000 for municipalities of less than 2,500 population; $50,000 for all others. If the amount of the contract is estimated to exceed $35,000 for municipalities of less than 2,500 population, or $50,000 for all others, sealed bids shall be solicited by public notice in the manner and subject to the requirements of the law governing contracts by the particular municipality or class thereof provided that with regard to repairs and maintenance of ditches, bids shall not be required if the estimated amount of the contract does not exceed the amount specified in section 103E.705, subdivisions 5, 6, and 7. 9 Vadnais Lake Area Water Management Organization Management Information Subd. 4. Contracts from $10,000 to $35,000 for municipalities of less than 2,500 population; $50,000 for all others. If the amount of the contract is estimated to exceed $10,000 but not to exceed $35,000 for municipalities of less than 2,500 population, or $50,000 for all others, the contract may be made either upon sealed bids or by direct negotiation, by obtaining two or more quotations for the purchase or sale when possible, and without advertising for bids or otherwise complying with the requirements of competitive bidding. All quotations obtained shall be kept on file for a period of at least one year after receipt thereof. Subd. 5. Contracts less than $10,000. If the amount of the contract is estimated to be $10,000 or less, the contract may be made either upon quotation or in the open market, in the discretion of the governing body. If the contract is made upon quotation it shall be based, so far as practicable, on at least two quotations which shall be kept on file for a period of at least one year after their receipt. This report is intended solely for the information and use of those who have responsibility for oversight of the financial reporting process. July 24, 2003 Ktg gA171,( HLB TAUTGES REDPATH, LTD. Certified Public Accountants 10