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Home My WebLink AboutManagement Report and Recommendations 12/31/1996CITY OF LINO LAKES, MINNESOTA MANAGEMENT REPORT AND RECOMMENDATIONS DECEMBER 31, 1996 To the Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota TAUTGES, REDPATH & CO.. LTD. RTIFIED PUBLIC, a(' This Report is prepared in conjunction with the audit of the City's 1996 Annual Financial Report. This report is designed to provide the City added analysis of financial trends, compliance issues and fund position. This report presents trend analysis to illustrate the impact of the changes on the overall funding of basic governmental services of the City, and updates financial analysis of funds and account balances of the City. Areas which may be of particular interest to the City are as follows: • The fund balance of the General Fund increased $636,794 in 1996 to a total of $2,723,025 at December 31, 1996. • The City was awarded the Certificate of Achievement for Excellence in Financial Reporting for its 1995 Comprehensive Annual Financial Report. • A recent change in accounting standards will require the City to report its investments at market value beginning in 1998. We offer recommendations for improvement as appropriate with a summary of such recommendations on the last page of this report. Additionally, we are available to discuss this report with the City upon request. Respectfully submitted, 441€4,11, TAUTGES, REDPATH & CO., LTD. Certified Public Accountants April 10, 1997 4810 White Bear Parkway • White Bear Lake. Minnesota 55110 • 612/426 -7000 • FAX /426 -5004 • Member of HL'_. IMMO VEIN City of Lino Lakes, Minnesota Management Report, Page 2 ACCOUNT BALANCE ANALYSIS OF THE COMBINED FINANCIAL STATEMENTS The combined financial statements of the City of Lino Lakes are presented in Statements 1 through 5 of the 1996 Annual Financial Report. The following comments relate to the Combined Balance Sheet - All Funds (Statement 1). Cash and Investments Cash and investments were as follows at December 31, 1995 and 1996: Description Treasurer's balance - checking Petty cash Investments: Certificates of deposit Commercial paper FNMA notes and mortgage backed securities Mutual funds Federal Farm Credit Bank Federal Home Loan Mortgage Corp. notes and mortgage backed securities Treasury notes and certificates of accrual Federal Home Loan Bank notes Student Loan Marketing Association notes Municipal bond Certificate of Indebtedness Totals December 31, 1995 1996 $367,694 $460,307 400 400 482,160 1,755,923 2,299,797 1,589,870 200,000 1,934,427 1,678,121 500,000 100,000 251,000 710,515 5,137,749 2,866,761 1,364,249 2,547,642 1,772,977 Increase (Decrease) $92,613 228,355 3,381,826 566,964 (225,621) (200,000) 613,215 94,856 (500,000) (100,000) 300,000 300,000 313,000 62,000 $11,159,392 $15,473,600 $4,314,208 Interest on investments totaled $584,838 in 1996 and $575,116 in 1995. The above investments are in compliance with State statutes and the City's investment policy. City of Lino Lakes,MVlinnesota Management Report, Page 3 A schedule of cash and investment balances by fund type (as adjusted for interfund payables/receivables) is as follows: Fund December 31, Increase 1995 1996 (Decrease) General $1,937,813 $2,671,992 $734,179 Special Revenue (75) 21,653 21,728 Debt Service 562,860 246,555 (316,305) Capital Project 7,975,681 10,434,809 2,459,128 Enterprise 552,116 1,984,735 1,432,619 Agency 130,997 113,856 (17,141) Total $11,159,392 $15,473,600 $4,314,208 Overall cash balances increased by $4,314,208 of which $3,131,754 consists of unspent bond proceeds which are restricted for future contruction costs. Accounting Standards The Governmental Accounting Standards Board (GASB) issued in March, 1997, a final statement on accounting and financial reporting for certain investments (Statement No. 31). This statement will require investments in (a) interest- earning investment contracts, (b) external investment pools, (c) open -end mutual funds, (d) debt securities, and (e) equity securities to be reported at fair value. Fair value is the amount at which a financial investment could be exchanged in a current transaction between willing parties. Essentially, this statement will require the City to record virtually all investments at fair value. Currently, the City's investments are recorded at amortized cost in accordance with current accounting principles. The change in fair value of investments is required to be allocated to all funds participating in the City's investment pool. This change may result in greater "swings" in investment earnings because of market changes. At December 31, 1996, the carrying value and market value of the City's investments was $14,395,191 and $14,180,870 respectively, a difference of $215,000. UMW Wm Er vamo City of Lino Lakes, Minnesota Management Report, Page 4 Property Taxes Receivable Delinquent taxes receivable were as follows for the past several years: 1993 1994 1995 1996 Delinquent balance - January 1 $76,791 $29,534 $27,804 $22,367 Current levy (1) 1,604,664 1,841,666 2,199,426 2,624,043 Total receivable 1,681,455 1,871,200 2,227,230 2,646,410 Receipts: County: Current 1,588,279 1,815,761 2,178,795 2,595,960 Delinquent 50,099 15,014 21,206 15,641 Total receipts 1,638,378 1,830,775 2,200,001 2,611,601 Unadjusted balance Adjust to County Delinquent balance Total collections as a percent of current levy (1) exludes HACA 43,077 40,425 27,229 34,809 (13,543) (12,621) (4,862) (12,319) $29,534 $27,804 $22,367 $22,490 102% 99% 100% 100% The City has experienced a solid tax collection rate over the past four years. The adjustments represent amounts provided by Anoka County for abatements and other adjustments to the delinquent balances. City of Lino Lakes, Minnesota Management Report, Page 5 Tag Increment Receivable The City had delinquent tax increments in the amount of $1 at December 31, 1996 as follows: 1995 1996 Delinquent balance - January 1 $2,483 $2,640 Current levy 319,303 377,093 Total receviable 321,786 379,733 Receipts: Current 316,982 375,669 Delinquent (3,369) 2,638 Total receipts 313,613 378,307 Unadjusted balance 8,173 1,426 Adjustments: Net adjustments (5,533) (1,425) Delinquent balance - December 31 $2,640 S1 Special Assessments Receivable Special assessments receivable consisted of the following amounts at December 31, 1995 and 1996: December 31, Increase 1995 1996 (Decrease) Delinquent $37,341 S21,040 ($16,301) Deferred 2,484,797 4,785,037 2,300,240 City property 10,510 (10,510) Due from County 14,467 2,926 (11,541) Totals $2,547,115 $4,809,003 S2,261,888 Delinquent assessments receivable consist of amounts collectible in 1996 and prior years which the City has not yet received. The assessments of City property relate to parcels purchased by the City for ponding purposes. During 1996, the City deleted the assessments on City property. Wwwr Imo WNW City of Lino Lakes, Minnesota Management Report, Page 6 A summary of assessment collections for the past four years is as follows: Delinquent balance - January 1 1993 1994 1995 1996 $118,690 $43,036 $36,497 $37,341 Add: Current installment 632,067 387,200 394,770 366,146 Amount collectible 750,757 430,236 431,267 403,487 Less: Current collections 580,678 355,543 353,424 355,609 Delinquent collections 39,313 32,743 26,051 26,831 Total collections 619,991 388,286 379,475 382,440 Adjustments (87,730) (5,453) (14,451) (7) Delinquent balance - December 31 $43,036 $36,497 $37,341 $21,040 Current collection rate 92 % 92 % 90% 97% Total collections as a percent of current levy 98% 100% 96% 104% As shown above, the City continues to experience a stable collection rate. City of Lino Lakes, Minnesota Management Report, Page 7 GENERAL FUND 1 The general fund of the City is maintained to account for the current operating and capital outlay expenditures common to all cities. These basic services include general government, public safety, public works and parks, recreation and forestry. State aids (mcluding local government aid, HACA and other state aids) and local property taxes represent approximately 66% of revenue sources of the general fund for 1996 and 74% of budgeted revenue sources for 1997. A schedule of these revenue sources of the general fund is as follows: State Aids Property Taxes All Other Total Year Amount Percent Amount Percent Amount Percent Amount Percent 1989 $682,407 32.8% $848,472 40.8% $550,916 26.5% $2,081,795 100.0% 1990 600,419 26.2% 994,399 43.3% 699,831 30.5% 2,294,649 100.0% 1991 452,364 18.7% 1,179,087 48.7% 790,083 32.6% 2,421,534 100.0% 1992 564,514 20.9% 1,206,998 44.6% 934,282 34.5% 2,705,794 100.0% 1993 628,790 19.8% 1,420,369 44.7% 1,128,503 35.5% 3,177,662 100.0% 1994 651,370 19.8% 1,597,542 48.5% 1,046,486 31.8% 3,295,398 100.0% 1995 674,079 17.9% 1,941,415 51.5% 1,156,841 30.7% 3,772,335 100.0% 1996 722,246 15.6% 2,327,048 50.3% 1,578,238 34.1% 4,627,532 100.0% 1997* 714,280 15.6% 2,658,110 58.2% 1,191,920 26.1% 4,564,310 100.0% * Budgeted City of Lino Lakes, Minnesota Management Report, Page 8 All other revenue consists of the following as of December 31, 1995 and 1996: December 31, Increase 1995 1996 (Decrease) Licenses and permits $544,267 $788,480 $244,213 Federal aid 28,598 58,047 29,449 County aid 35,975 36,501 526 Charges for services 241,393 308,262 66,869 Fines and forfeits 93,861 86,158 (7,703) Interest on investments 78,659 86,615 7,956 Refunds and reimbursements 32,481 57,549 25,068 Gas franchise fees 30,486 41,726 11,240 Cable TV 18,255 48,437 30,182 Miscellaneous 52,866 66,463 13,597 Total $1,156,841 $1,578,238 $421,397 The increase in licenses and permits is due to increased institutional and industrial development in 1996. The increase in charges for services is due to an increase in administrative and engineering/planning fees resulting from bonding in 1996. City of Lino Lakes, Minnesota Management Report, Page 9 State aids for the General Fund have consisted of the following amounts from 1991 through 1996 actual and 1997 budgeted: 1997 State Aids 1991 1992 1993 1994 1995 1996 Budgeted Local Goverment Aid S95,440 $94,960 $90,138 $145,445 $149,372 $155,212 $150,170 Local Performance Aid - 14,770 Homestead Credit 251,303 290,428 356,182 368,324 380,335 367,492 381,340 Equalization aid 42,991 45,547 42,854 Police Aid 43,044 44,692 47,253 43,622 56,817 89,984 68,000 MSA - Streets 13,170 81,232 86,246 85,187 77,945 102,820 100,000 Other Aids 6,416 7,655 6,117 8,792 9,610 6,738 Totals $452,364 $564,514 $628,790 $651,370 $674,079 $722,246 $714,280 Percent change 24.66% 24.79% 11.39% 3.59% 3.49% 7.15% (1.10)% City of Lino Lakes, Minnesota Management Report, Page 10 The LGA formula is quite complex. However, an analysis of the components of the formula provides an understanding. The following illustration identifies the components of the LGA formula: fCity Base Aid 1993 LGA City Formula Aid • LGA Price Index Change Since 1993 City Revenue Need x City Population City Tax Capacity x Average Tax Rate For all Cities City revenue need is equal to the sum of the following items: 3.462312 x Pre -1940 housing percentage + 2.093826 x Commercial industrial percentage + 6.862552 x Population decline percentage + 0.00026 x City population + 152.0141 = Subtotal x Price index change = City revenue need For 1997, the City's LGA is as follows: City base aid $140,181 City formula aid 14,520 Subtotal 154,701 Less reduction for State costs (203) Less reduction for TIF (4,331) 1997 LGA $150,167 City of Lino Lakes, Minnesota Management Report, Page 11 Revenue of the general fund for the past two years has been as follows: Property taxes Licenses and permits Intergovernmental revenue: Federal State County Charges for services Fines and forfeits Interest on investments Other Totals 1995 1996 Increase Amount Percent Amount Percent (Decrease) $1,941,415 51.5% $2,321,048 50.3% $385,633 544,267 14.4% 788,480 17.0% 244,213 28,598 0.8% 58,047 1.3% 29,449 674,079 17.9% 722,246 15.6% 48,167 35,975 1.0% 36,501 0.8% 526 241,393 6.4% 308,262 6.7% 66,869 93,861 2.5% 86,158 1.9% (7,703) 78,659 2.1% 86,615 1.9% 7,956 134,088 3.4% 214,175 4.5% 80,087 $3,772,335 100.0% $4,627,532 100.0% $855,197 Detail of the above revenue is presented in Statement 7 of the 1996 Annual Financial Report. General Fund 1996 Revenue By Source Fines and Forfeits 1.9% Interest and All Other 6.4% Licenses and Permits 17.0% Property Taxes 50.3 % City of Lino Lakes, Minnesota '" Management Report, Page 12 Expenditures of the general fund for the past two years are as follows: 1995 1996 Increase Amount Percent Amount Percent (Decrease) Current: General government $1,170,345 32.9% $1,233,867 31.1% $63,522 Public safety 1,242,959 34.9% 1,438,478 36.3% 195,519 Public works 692,516 19.5% 670,786 16.9% (21,730) Parks, recreation and forestry 395,297 1L1 % 442,554 11.2% 47,257 Capital outlay 55,921 1.6% 181,053 4.5% 125,132 Totals $3,557,038 100.0% $3,966,738 100.0% $409,700 Details of the above expenditures are presented in Statement 7 of the 1996 Annual Financial _ Report. WNW Mar Maw General Fund 1996 Expenditures By Category Parks, Recreation & Forestry 11.2% Public Works 16.9% Capital Outlay 4.5% General Government 31.1% Public Safety 36.3% City of Lino Lakes, Minnesota Management Report, Page 13 The fund balance of the general fund increased by $636,794 in 1996 as follows: Budgeted increase in fund balance $47,855 Actual revenues over (under) budgeted revenues: Property taxes ($1,254) Licenses and pets 381,548 Intergovernmental revenue 64,960 Charges for services (8,918) Fines and forfeits (3,842) Interest on investment 36,615 Refunds and reimbursements 22,717 Miscellaneous 36,701 Net revenue over budget Actual expenditures under (over) budgeted expenditures: General government 52,353 Public safety (838) Public works 20,044 Parks, recreation and forestry (4,039) Capital outlay 16,892 Net expenditures under budget 528,527 84,412 Other financing uses (over) budgeted amounts Operating transfer to Capital Projects Fund (24,000) Total increase in fund balance $636,794 Detail of the preceding budget variances are presented in Statement 7 of the 1996 Annual Financial Report. As previously discussed, licenses and permits are over budget due to institutional and industrial development. Intergovernmental revenue is over budget due in part to the City receiving a supplemental COPS grant which allowed the City to hire an additional police officer. Charges for services are over budget due to increased administrative and engineering/planning fees being charged, which was a result of the City issuing improvement bonds in 1996. City of Lino Lakes, Minnesota Management Report, Page 14 The City's December 31, 1996 fund balance totaled $2,723,025. The City's General Fund balance has been as follows for the past ten years: December 31, 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Fund Balance Reserved/ Designated $52,593 96,626 53,290 1,169,624 1,265,236 1,406,296 1,673,039 1,870,934 2,086,231 2,723,025 Undesignated Total Increase $589,799 $642,392 747,836 844,462 $202,070 976,763 1,030,053 185,591 1,169,624 139,571 1,265,236 95,612 1,406,296 141,060 83,620 1,756,659 350,363 1,870,934 114,275 2,086,231 215,297 2,723,025 636,794 The 1990 increase in designated fund balance reflects the City's adoption of a reserve policy pursuant to resolution 91 -3. The reserve policy addresses three areas: 1) Cash flow requirements, 2) Contingent employee benefits, and 3) General contingencies. Cash Flow Reserve. As previously stated, property taxes and related state aids account for over 74% of budget 1997 revenue sources of the General Fund. This revenue is not received until July and December of each year (the second half of the year). As a result, the City is required to have sufficient reserves at the beginning of the year to fund operations of the first half of the year. The City's cash flow reserve requirement is computed as follows: 1997 Budgeted Levy 1997 Anticipated HACA 1997 Anticipated Local Government Aid 1997 Anticipated Local Performance Aid Total Cash -Flow Reserve (50% of total) $2,646,110 381,340 150,170 14,770 $3,192,390 $1,596,195 City of Lino Lakes, Minnesota Management Report, Page 15 The following graph of monthly General Fund cash balances illustrates the impact of receiving property taxes and State aids in the second half of the year. As indicated above the General Fund's cash balance decreased between January and July. This graphic illustration emphasizes the importance of the City's cash flow reserve. General Contingency Reserve. The general contingency reserve is equal to 15% of the City's general fund expenditure budget for the ensuing year as follows: 1997 budgeted expenditures $4,564,310 Applicable percentage 15 % General contingency reserve $684 ,647 VNIIM City of Lino Lakes, Minnesota Management Report, Page 16 Employee Benefits Reserve. The employee benefits reserve is computed based upon accrued, but unpaid, employee benefits as follows: December 31, Employee Benefit 1995 1996 Vacation leave 8114,242 8117,044 Severance 69,773 72,271 Unused sick leave 278,503 304,240 Total $462,518 $493,555 A summary of these reserves is as follows: Reserve/Designation Amount Prepaid items $110,077 Cash flow 1,596,195 General contingency 684,647 Employee benefits 332,106 Totals $2,723,025 The City of Lino Lakes has improved the financial position of its General Fund over the past several years. We commend the City for these actions and encourage the City to continue to monitor this reserve balance. An adequate reserve structure will enable the City to retain its financial independence and integrity during adverse economic conditions. City of Lino Lakes, Minnesota Management Report, Page 17 A summary of the purposes and benefits of general fund reserve balances is as follows: Purpose of Reserves . Benefits of Reserves Cash flow timing differences. • Favorable bond rating indicator. • Supplements revenues with investment earnings. • Provides resources for minor projects or feasibility reports. • Avoids temporary overdrafts prior to major receipts. • City may study effects of revenue cuts before gradual program reductions. • Avoids overburdening of annual budgets for certain capital outlay. • Provides the City greater options to deal with unexpected events. Expenditures are incurred somewhat evenly throughout the year. Property taxes & State aids are not received until the second half of the year. A reserve of one-half of such revenues is therefore recommended. Intergovernmental revenue cutbacks. The City is vulnerable to legislative actions at both the Federal = & State level. Federal funding to local government has been substantially curtailed in recent years. Annual adjustment of Local Government Aid & HACA formulas is a constant threat Capital outlay replacement. Internal escrow accumulation for purchases which may exceed amounts available in any single budget cycle. This may also be accomplished through transfers to dedicated replacement funds. Emergency or unanticipated expenditures. Examples include natural disasters, lawsuits, comparable worth implementation and premature breakdown of vital equipment. Special City Council projects, Preliminary studies, interfund loans and minor projects are examples of reserve uses. City of Lino Lakes, Minnesota Management Report, Page 18 i SPECIAL REVENUE FUNDS 1 The financial statements for the City's special revenue funds are presented in Statements 8 and 9 of the 1996 Annual Financial Report. Special revenue funds are a type of governmental fund to account for the proceeds of specific revenue sources (other than expendable trusts or for major capital projects) that are restricted to expenditures for specified purposes. The City maintained the following special revenue funds in 1995 and 1996: Fund Fund Balance December 31, Increase 1995 1996 (Decrease) Economic Development Authority $ - $ - $ - Community Development Block Grant (1,201) 166 1,367 Program Recreation 12,680 22,312 9,632 Total $11,479 $22,478 $10,999 Economic Development Authority During 1990, the City adopted Resolution 33 -90 which authorized the City to establish an — Economic Development Authority (EDA) pursuant to Minnesota Statutes sections 469.00 through 469.108. The EDA was established with specific powers and obligations to promote and to provide incentives for economic development within the City of Lino Lakes. The financial activity of the EDA has been reported in the City's Annual Financial Report in accordance with the Governmental Accounting Standard Board (GASB) Statement No. 14 the financial reporting entity. City of Lino Lakes, Minnesota Management Report, Page 19 Community Development Block Grant The Community Development Block Grant (CDBG) Fund was established in 1982 to account for the financial activity related to the projects to be funded by the CDBG program. The City entered into an agreement with Anoka County to receive CDBG funds. The County of Anoka, along with other governmental units, was awarded the grant. The City of Lino Lakes is considered to be a sub - grantee and must comply with the provisions of the grant agreement. The City has established the compliance procedures that are required to be documented in City records. Proper documentation with the grant agreement has aided the City in receiving the monies applied for regarding the reimbursement of City expenditures. As of December 31, 1996 this fund had a fund balance of $166. Prior to 1996, this fund was reported in the Annual Financial Report as a Capital Project Fund type. Program Recreation This fund was established in 1993 to account for direct costs of self - supporting recreation programs. A summary of 1996 financial activity is as follows: Revenue: Recreation fees $74,454 Interest 955 Total revenue 75,409 Expenditures: Personal services 38,394 Supplies 26,424 Other services and charges 402 Contractual services 557 Total expenditures 65,777 Revenue over expenditures $9,632 Prior to 1997, the City did not formally adopt a budget for this fund. The City has formally adopted a budget for 1997. Vow Vamp loom low City of Lino Lakes, Minnesota Management Report, Page 20 DEBT SERVICE FUNDS The combining financial statements for the debt service funds are presented in Statements 10 and 11 of the 1996 Annual Financial Report. Debt service funds are a type of governmental fund to account for the accumulation of resources for the payment of interest and principal on 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 several sections of the 1996 Annual Financial Report to assist in this analysis. The following schedule compares outstanding debt with assets pledged for debt retirement. This comparison provides a means to judge (on a preliminary basis) the financial position of each debt service fund. December 31, 1996 Scheduled Final Fund Deferred Outdanding Property Maturity Fund Description Balance Revenue Total Debt Taxes Date General Debt: 1994 Certificates of Indebtedness S9,780 $609 $10,389 $ - $ - 12/31/96 1995 Certificates of Indebtedness 5,259 673 5,932 88,000 97,944 12/31/97 1996 Equipment Certificates - - 225,000 277,571 12/31/99 Public Project Revenue Bonds of 1990A 181,744 802 182,546 1,065,000 1,702,159 2/1/10 Total general debt 196,783 2,084 198,867 1,378,000 2,077,674 Special Assessment Debt: Improvement Bonds of 1992A 131,625 92,570 224,195 2,990,000 2,869,513 2/1/06 Improvement Bonds of 1996A 13 136 1,700 000 1 713 136 4 685 000 - 2/1/07 Total special assessment debt 144 761 1 792,570 1,937,331 7 675 000 2,869,513 Total - All Debt Service Funds $341,544 $1,794,654 $2,136,198 $9,053,000 $4,947, 187 City of Lino Lakes, M Minnesota Management Report, Page 21 The following decision chart prompts questions to further evaluate a funds financial position: Condition A Fund balance plus deferred revenue meets or exceeds bonds payable. Condition B Fund balance plus deferred revenue is less than bonds payable. Is the City experiencing favorable collection rates for special assess- ments? 2. Are anticipated investment interest rates earned on prepayments ade- quate to replace assessment interest? 3. Is the timing of receipts sufficient to meet bonded debt payments as they become due? 4. Are significant portions of assess- ments not scheduled for collection (green acres, tax forfeit, etc.)? 5. Is arbitrage or negative arbitrage an issue? 1. Are sufficient future assets scheduled (such as property taxes) to meet bonded debt payments? 2. Are cash assets sufficient to generate investment earnings? 3. Are transfers or other funding sources available? 4. Are there future assets to pledge such as assessments, MSA allot- ments, etc.? The debt service fund is clearly adequately funded. Plan for eventual use of surplus. Conclusion 1 The debt service fund is clearly not adequately funded. Plan for altern- ative funding (taxes, Eransfers, other sources) Conclusion 2 Variables and possible outcomes are too diverse. Prepare projections to analyze possible scenarios and options. Conclusion 3 City of Lino Lakes, Minnesota '" Management Report, Page 22 "" 1990A Public Project Revenue Bonds These bonds were issued by the City's Economic Development Authority for the construction of a fire station and the purchase of related equipment. These bonds are obligations of the EDA and will be payable solely from revenues received from the City pursuant to an Installment Purchase Contract. The City will levy taxes for payment of the installment contract. Improvement Bonds of 1992A The City issued these bonds to retire the 1989 Temporary Improvement Bonds and provide additional financing for projects originally financed by the 1989 Bonds. Temporary Improvement Bonds of 1994A The City issued these bonds to provide financing for Trunk Highway 49 /CSAH 23 improvements, Country Lake Estate Phase I and Hodgson Road Trunk watermain. This bond issue was retired by a combination of assessments, area and unit charges, tax increment and Anoka County reimbursements. These bonds were called for early redemption on November 1, 1996. Improvement Bonds of 1996A — The City issued these bonds to provide financing for the following projects: • 4th Avenue trunk utilities • Cedar Street lift station • Trapper's Crossing improvements • Marshan condominiums • Centennial School • Pheasant Hills 7th Addition This bond issue will be retired by a combination of special assessments and area and unit charges. The City adopted assessments for the Trapper's Crossing and Marshan Lake condominium projects in 1996. Assessments for the Centennial School and Pheasant Hills 7th addition projects will be assessed in 1997. The 4th Avenue trunk utility and Cedar Street lift station projects will be repaid exclusively through area and unit charges. City of Lino Lakes, Minnesota Management Report, Page 23 CAPITAL PROJECT FUNDS The financial statements for the capital project funds are presented in Statements 12 and 13 of the 1996 Annual Financial Report. The fund balances (deficits) of the Capital Project Funds at December 31, 1995 and 1996 are as follows. Fund Dedicated Park Capital Improvement Projects Closed Bond Fund Area and Unit Charge Surface Water Management Interim construction MSA construction Sealcoating Street reconstruction SAC revolving 1994 construction 1995 construction 1996 construction 1997 construction Apollo Business Park Apollo Drive construction Town Center Project Tax Increment #1 -1 Tax Increment #1 -2 Tax Increment #1-4 Tax Increment #1 -5 Tax Increment #1-6 Tax Increment #1 -7 Tax Increment #3 -1 Totals Fund Balance (Deficit) December 31, 1995 1996 $249,014 (15,526) 763,099 5,945,209 515,757 16,057 52,156 203,428 $280,067 37,276 912,241 6,037,474 735,432 16,223 54,798 272,725 20,435 500,266 524,555 (334,536) (17,760) (35,030) 10,674 (61,560) 1,882,897 (122,853) 163,316 191,557 118,648 117,150 (36,536) 193,474 347,899 28,869 150,269 (36,069) (4,460) (1,342) (1,771) (26,039) (27,578) (157,853) (179,910) (5,381) (3,991) $8,075,957 $11,196,813 Increase (Decrease) $31,053 52,802 149,142 92,265 219,675 166 2,642 69,297 20,435 24,289 316,776 45,704 1,944,457 (122,853) 28,241 (1,498) (36,536) 154,425 121,400 31,609 (429) (1,539) (22,057) 1,390 $3,120,856 Closed Bond Fund During 1996 the City reclassified the Closed Bond Fund from a Debt Service Fund to a Capital Project Fund type. The Closed Bond Fund accounts for excess funds from matured bond issues. City of Lino Lakes, Minnesota Management Report, Page 24 Dedicated Parks This fund was established to account for dedicated park fees. The City uses the Dedicated Parks Fund to collect ordinance restricted fees and donations from various groups. This fund collected $38,645 and $42,560 of park dedication fees in 1995 and 1996, respectively. The fund balance of $280,067 at December 31, 1996 is available for expenditures by the City to fund capital outlay and maintenance of dedicated park lands. Capital Imnrovement Proiects Fund This fund accounts for the proceeds of Equipment Certificates. The following schedule — summarizes the activity of this fund through December 31, 1996: Prior Years 1996 Total Revenue and other sources: Proceeds from equipment certificates $1,572,822 $225,000 $1,797,822 Interest earnings 82,081 4,400 86,481 Property taxes 14,560 - 14,560 MSA 4,944 4,944 Donations 18,686 18,686 Refund and reimbursements - 1,840 1,840 Transfer from General Fund 24,000 24,000 Transfer from Agency fund 20,156 - 20,156 Transfer from Debt Service fund 2,390 2,390 Total Expenditures: Capital outlay $1,715,639 $255,240 1,970,879 $1,731,165 $202,438 1,933,603 Fund balance - December 31, 1996 $37,276 City of Lino Lakes, Minnesota Management Report, Page 25 Detail of the 1996 expenditures is as follows: Budget Actual Variance Police: Two patrol vehicles $40,000 S39,644 (S356) Government building: Copier/laser printer 20,000 19,541 (459) Shop yard fencing 18,000 - (18,000) Replace fuel tanks 62,000 70,635 8,635 Other - 53 53 Building inspections: Geobase/permit software 1,980 1,980 Fire: Fire budget 63,000 63,000 Streets: Pickup truck 22,000 (22,000) Parks: Tractor broom 6,177 6,177 Finance: Other - 1,408 1,408 Total $225,000 $202,438 ($22,562) The streets department pickup truck was purchased in 1995. 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 the City continue to monitor actual versus projected area and unit assessment collections to assure that debt payment requirements will be met. City of Lino Lakes, Minnesota Management Report, Page 26 A schedule of transactions of this fund from inception is as follows: Prior Years 1996 Total Revenue and other sources: Area and unit charges $6,424,559 $1,273,232 $7,697,791 Interest on investments 784,620 281,713 1,066,333 MSA 11,342 230,513 241,855 Bond proceeds - 910,938 910,938 Utility charges 239,142 239,142 Transfer from Tax Increment 11 -1 1,097,491 - 1,097,491 Transfer from Tax Increment #1 -2 512,196 512,196 Transfer from 1989 construction 29,842 29,842 Transfer from Water Fund 724,489 724,489 Total $9,584,539 $2,935,538 12,520,077 Expenditures and other uses: Professional services $119,606 $47,898 167,504 Construction: Various 12,000 12,000 Ware Road Utility Improvements 121,751 121,751 Well /3 99,613 99,613 Well 14 164,490 273,776 438,266 Blackduck lift station 6,871 27,423 34,294 Fourth Avenue trunk utilities - 410,899 410,899 Cedar Street lift station 204,274 204,274 35W/TH49 trunk utilities 20,070 20,070 35E main/trunk 1,764 - 1,764 Watertower #2 1,312 1,312 Sunset Road utilities 573 573 Transfer to Interim Construction 73,183 73,183 Transfer to 1991 Construction 388,965 388,965 Debt Service: Transfer to Temp Bonds of 1990B 665,232 665,232 Transfer to Temp Bonds of 1991A 1,698,510 1,698,510 Transfer to Temp Bonds of 1994A - 1,858,933 1,858,933 Transfer to Water Fund (1992B Bonds) 285,460 - 285,460 Total $3,639,330 $2,843,273 6,482,603 Fund balance $6,037,474 City of Lino Lakes, Minnesota Management Report, Page 27 The transfers from the tax increment funds represent partial reimbursement for cost of the West Central Trunk sewer main which serves Rice Lake Estates (TIF 1 -1) and Sunrise Meadows (TIF 1 -2). 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 Bonds of 1992A Improvement Bonds of 1996A Water Revenue Bonds of 1992B Water Revenue Bonds of 1996B The Improvement Bonds of 1992A have future scheduled property tax levies totaling $2,869,513. Revenue from area and unit charges are expected to be sufficient to cancel these levies. The Water Revenue Bonds of 1992B have future debt service requirements totaling $1,375,286 (principal and interest). The City annually transfers amounts from the Area and Unit Charge Fund to the Water Fund sufficient to cover the debt services of The Bonds of 1992B. During 1996 revenues were sufficient in the Water Fund to cover the debt service requirements and a transfer was not required. It is the City's intention to repay the Water Revenue Bonds of 1992B 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. During 1996, the City transferred $1,858,933 to the Temporary Bonds of 1994 Debt Service Fund to prepay all bonds maturing after November 1, 1996. IMEr City of Lino Lakes, Minnesota Management Report, Page 28 The assessment portion which relates directly to current construction costs (lateral assessment charges) is pledged directly to the related debt service fund to retire outstanding bonds. The area and unit charge portion of the assessment roll, however, is governed by the City's policy which was established by Resolution #1 -88. Such area and unit charges are contingently pledged to the related debt service fund in accordance with this policy. These amounts are to be segregated to the Area and Unit Charge Fund and such amounts are transferred on an as needed basis to the related debt service fund. Any surplus accruing above the amount required to retire bonds will be available for expansion of the core water and sewer systems of the City. The 1996 bond proceeds are related to the 4th Avenue trunk utilities and the Cedar Street lift station projects. The MSA revenue is related to the TH49 and Lake Drive project which was financed by the Temporary Bonds of 1994. During 1996, the City implemented a new utility billing system which allows the area and unit charge to be recorded directly to the Area and Unit Fund. Prior to 1996, the charge was recorded in the Water Fund and transferred to the Area and Unit Fund. During 1989 the City amended its procedure relative to adoption of assessment rolls. The amended procedure requires that the City split assessment rolls between the Area and Unit Charge Fund and the related Debt Service Fund. Surface Water Management Fund This fund was established in 1989 to account for the financing of surface water management planning and storm sewer trunk lines. During 1990, the City levied its first assessments for surface water management charges. The cost of the plan will be financed by developer charges. The City is in the process of implementing items identified by the Surface Water Management Plan. Interim Construction The Interim Construction Fund was established in 1985 to account for the preliminary construction costs prior to permanent bonding or other financing determination. The fund balance of this fund was $16,223 at December 31, 1996. MSA Construction The MSA Construction Fund was established in 1990 to account for the collection of assessments on MSA projects in accordance with the City's Public Improvement Financing Policy. The fund balance of this fund was $54,798 at December 31, 1996. City of Lino Lakes, Minnesota Management Report, Page 29 Sealcoating This fund was established in 1991 to account for money received from private developers for future sealcoating in new housing developments. A summary of transactions of this fund is as follows: Prior Years 1996 Total Revenue and other sources: Special assessments $328,082 $63,156 $391,238 Interest earnings 22,591 11,073 33,664 Refunds and reimbursements 73,623 24,673 98,296 Total $266,871 $98,902 523,198 Expenditures $220,868 $29,605 250,473 Fund balance - December 31, 1996 $272,725 SAC Revolving The SAC Revolving Fund was established m 1990 to account for a refund from the MCES (formerly MWCC) of past SAC charges which were paid by residents that had not hooked up to the sewer system. A summary of financial activity of this fund is as follows: Prior Years 1996 Total Revenue SAC refund $365,175 $ - $365,175 Interest earning 135,091 24,289 159,380 Total revenue $500,266 $24,289 524,555 Expenditures $ - $ - Fund Balance - December 31, 1996 $524,555 City of Lino Lakes, Minnesota '"' Management Report, Page 30 Nat Y Vow Street Reconstruction This fund was established in 1996 to account for revenue received from developers for future street reconstruction. 1994 Construction This fund was established to account for the various projects financed by the Temporary Improvement Bonds of 1994A. A summary of the financial activity of this fund is as follows: Budget Actual Variance Financing sources: Bond proceeds $2,079,350 $1,903,614 ($175,736) MN DOT Reimbursement 713,989 613,806 (100,183) Anoka County 583,917 658,323 74,406 Circle Pines - 1,628 1,628 Interest earnings - 34,944 34,944 Other - 9,357 9,357 Total sources $3,377,256 3,221,672 ($155,584) Financing uses: Construction costs: Issuance costs $25,000 ($25,000) Country Lake Estates 636,750 913,648 276,898 Highway 49 and Lake Drive 1,988,400 2,028,641 40,241 Hodgson Road watermain 200,200 297,143 96,943 Total uses $2,850,350 3,239,432 $389,082 Fund balance - December 31, 1996 ($17,760) The remaining MN DOT reimbursement was coded to the Area and Unit Charge Fund since the Temporary Improvement Bonds of 1994A were called early using Area and Unit Funds. We recommend the City determine a funding source for the fund deficit and close this fund once the projects are completed. - 1995 Construction This fund was established to account for the construction costs related to the Woods of Baldwin Lake II. The project costs totaled $140,886 through December 31, 1996. The construction costs were financed by the City (i.e., no bonding). This project was assessed in 1995 in the amount of $146,304. City of Lino Lakes, Minnesota Management Report, Page 31 1996 Construction This fund was established to account for projects financed by the Improvement Bonds of 1996k A summary of the financial activity of this fund is as follows: Bond Construction Proceeds Costs Variance Trapper's Crossing improvements $954,581 $821,037 $133,544 Marshan condominiums 753,617 661,329 92,288 Centennial School 1,607,716 129,052 1,478,664 Pheasant Hills 7th addition 401,929 228,485 173,444 12th Avenue and Holly Drive - 2,201 (2,201) Total $3,717,843 $1,842,104 1,875,739 Interest earnings 7,158 Fund balance - December 31, 1996 $1,882,897 The Trapper's Crossing and Marshan condominium projects were assessed during 1996. 1997 Construction This fund was established to account for projects to be financed by the 1997 Bonds. During 1996, preliminary costs were incurred on the Otter Lake Road realignment, Otter Lake Service Road, and Trapper's Crossing II projects. The projects will be bonded in 1997. Apollo Business Park This fund was established in 1992 to account for construction costs in developing the City's industrial park. This fund had a fund balance of $191,557 at December 31, 1996. Apollo Drive Construction This fund was established in 1992 to account for improvements to Apollo Drive. The fund balance of this fund was $117,150 at December 31, 1996. Town Center Project This fund was established in 1996 to account for costs associated with the construction of the City Town Center project. Now WON City of Lino Lakes, Minnesota Management Report, Page 32 Tax Increment Financing #1 -1 On January 26, 1987 the City established the Economic Development District #1. Within the District, the City established Housing District #1 -1. The housing plan calls for adequate numbers of low to moderate housing units pursuant to MS 273.73 subd. 11. Financial activity of this fund from inception is as follows: Prior Years 1996 Total Revenue and other sources: Tax increments $1,247,781 $231,815 $1,479,596 HACA 8,683 8,683 Interest on investments 207,162 12,904 220,066 Total revenue and other sources $1,463,626 $244,719 1,708,345 Expenditures and other uses: Transfer to TIF 1 -3 $9,484 $ - 9,484 Transfer to TIF 1-4 22,122 22,122 Administrative fee 39,156 1,937 41,093 Developer assistance 105,000 65,350 170,350 Professional services 15,910 885 16,795 Transfer to Area and Unit Fund 1,097,491 1,097,491 Transfer to Special Revenue Fund 3,111 3,111 Total expenditures and other uses $1,270,152 $90,294 1,360,446 Fund balance - December 31, 1996 $347,899 The developer assistance consisted of payments to developers for pending improvements. The transfer to the Area and Unit Charge Fund represents a partial reimbursement for the West Central Trunk sewer main related to Rice Lake Estates. The tax increment plan also includes an annual administrative fee. Minnesota Statute 469.176 Subd. 3 reads as follows: Limitation on administrative expenses. (a) For districts for which certification was requested before August 1, 1979, or after June 30, 1982, no tax increment shall be used to pay any administrative expenses for a project which exceed ten percent of the total tax increment expenditures authorized by the tax increment financing plan or the total tax increment expenditures for the project, whichever is less. City of Lino Lakes, Minnesota Management Report, Page 33 Tax Increment Financing #1 -2 The City established Tax Increment Financing District #1 -2. This district qualifies as a Economic Development TIF district pursuant to Minnesota Statutes 469.174, subdivision 12. Financial activity of this fund from inception is as follows: Prior Years 1996 Total Revenue and other sources: Tax increments $555,196 $120,258 $675,454 Interest on investments 55,980 3,444 59,424 Total revenue and other sources 611,176 123,702 734,878 Expenditures and other uses: Administrative $57,517 1,500 59,017 Professional services - 802 802 Transfer to Area and Unit Charge Fund 512,196 512,196 Transfers to other funds 12,594 12,594 Total expenditures and other uses $582,307 $2,302 584,609 Fund balance - December 31, 1996 $150,269 Included in administrative expenses is an administrative fee of $18,500. The transfer to the Area and Unit Charge Fund represents a reimbursement for costs of the West Central Trunk sewer main related to Sunrise Meadows. City of Lino Lakes, Minnesota Management Report, Page 34 Tax Increment Financing #1 -4 The City established Tax Increment District #1-4 during 1990 by resolution 10 -90. District #1-4 is an Economic Development District. The duration of the district is eight years from the date of the receipt of the first increment or ten years from the date of approval of the TIF plan. At December 31, 1996 this fund had a deficit balance of $4,460. District #1-4 has anticipated project requirements as follows: Estimated Actual Land acquisition $435,000 $ Public improvements 1,115,000 Administrative 110,000 63,723 Bond discount 40,000 - Capitalized interest 360,000 Total $2,060,000 $63,723 During 1996, the City transferred $22,122 to TIF #1-4 from TIF #1 -1 for past years administrative costs that will not be recovered. Tax Increment Financing #1 -5 The City established Tax Increment District #1 -5 pursuant to MS 469.174 Subdivision 11 which qualifies it as a Housing District. The duration of the District is twenty -five years from the date of the first increment. The plan for District #1 -5 was approved and adopted on December 14, 1992. Tax Increment Financing #1 -6 District #1-6 is an Economic Development district and was established in August, 1994. The duration of the district is 10 years. City of Lino Lakes, Minnesota Management Report, Page 35 Tax Increment Financing #1 -7 District #1 -7 is an Economic Development district and was established in May, 1995. A schedule of budgeted and actual transactions for this district is as follows: Budget Actual Revenue: Tax increments $605,000 $10,373 Refunds - 3,800 Total revenue $605,000 14,173 Expenditures: Land acquisition $321,000 167,889 Public improvements 260,000 - Administrative 24,000 26,194 Total expenditures $605,000 194,083 Fund balance - December 31, 1996 ($179,910) Tax Increment Financing #3-1 District #3 -1 is an Economic Development district and was established in June, 1995. The duration of the district is 11 years. This district includes the Clearwater Creek Development Center. A summary of budgeted financial activity for this district is as follows: Revenue: Tax increments Budget Actual $1,450,000 $2,606 Expenditures: Land acquisition $900,000 Public improvements 450,000 Administrative 100,000 6,597 Total expenditures $1,450,000 6,597 Fund balance - December 31, 1996 ($3,991) a. aselt • Aft Y City of Lino Lakes, Minnesota Management Report, Page 36 ENTERPRISE (UTILITY FUND) The City maintains three enterprise operating funds. The financial statements for these funds are presented in Statements 14 through 16 of the 1996 Annual Financial Report. Statements of income and expense for 1996 (excluding depreciation on contributed assets) for the water and sewer utility fund are shown in the following schedule: Water Sewer 1995 1996 1995 1996 Operating revenue: Charges for services S290,588 S377,764 $439,843 5508,407 Other 47,886 53,233 43,278 19,100 Total operating revenue 338,474 430,997 483,121 527,507 Operating expenses: Personal services 69,790 73,337 63,715 71,844 Materials and supplies 47,250 40,019 865 2,267 Contractual services 17,361 47,619 8,969 17,828 Repair and maintenance 9,040 6,351 4,970 2,225 MCES sewer charges - 236,388 260,421 Depreciation 22,227 25,618 793 3,932 Other 34,283 43,452 36,582 44,071 Total operating expenses 199,951 236,396 352,282 402,588 Income from operations 138,523 194,601 130,839 124,919 Other income (expense): Interest on investments 18,708 35,313 7,567 11,480 Maintenance agreement - MCES Area and unit charges 179,250 - Bond interest and paying agent fees (64,118) (170,881) Total other income 133,840 (135,568) 7,567 11,480 Net income before transfers 272,363 59,033 138,406 136,399 Transfer from Area and Unit Charge Fund 104,565 Transfer to Area and Unit Charge Fund (179,250) - Net increase in retained earnings 197,678 59,033 138,406 136,399 Retained earnings - January 1, 1995 276,830 474,508 173,400 311,806 Retained earnings - December 31, 1995 5474,508 $533,541 5311,806 5448,205 As shown above, both the water and sewer funds experienced net increases in retained earnings for 1995 and 1996. Also as shown above, the single largest expense of the sewer fund is MCES sewer charges. City of Lino Lakes, Minnesota Management Report, Page 37 The MCES bills the City annually on an estimated basis. These billings are adjusted at a later date and the City is billed the additional amount or given a refund. The MCES billings for calendar years 1987 through 1997 have been as follows: Billings from MCES Estimated Final Percent Percent Year Amount Change Amount Change 1987 $37,845 $32,519 1988 41,351 9.26% 40,197 23.61% 1989 52,098 25.99% 48,521 20.71% 1990 67,232 29.05% 70,243 44.77% 1991 78,048 16.09% 96,542 37.44% 1992 104,090 33.37 % 131,251 35.95 % 1993 141,730 36.16% 167,079 27.30% 1994 198,918 40.35% 205,452 22.97 % 1995 229,851 15.55 % 239,841 16.74% 1996 250,435 8.96% N/A 1997 275,479 10.00% N/A 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 IMMP City of Lino Lakes, Minnesota Management Report, Page 38 There are two basic factors which contribute to increased billings from the MCES: 1. Changes in use of the system. The MCES has increased the 1997 estimated flow for the City of Lino Lakes by 10 %. 2. Increased cost to process sewage. The MCES's cost to process (per million gallons) increased to an estimated $1,318 in 1996 from an estimated $1,276 in 1995. This represents an increase of 3.3 %. The estimated cost for 1997 remained unchanged from 1996. The combination of the above factors has increased the City's estimated cost in 1996 by 9 %. During 1988 the City adopted a policy of charging a water user fee for core system improvements. The add -on charge is calculated based on a fixed amount per quarter. Prior to 1996, this charge was collected as revenue of the water enterprise fund along with normal ... charges. Such amounts were then transferred to the Area and Unit Charge Fund which financed (or will finance) such improvements. During 1996 the City implemented a new utility software system which allows the water user fee to be recorded directly to the Area and Unit Charge Fund. The water and sewer operations reflect retained earnings of $533,541 and $448,205, respectively. Retained earnings should not be equated with fund balance. The Utility operations are financed by user fees which are billed and collected only after the services are provided. This creates a timing difference between payment of expenses and collection of service charges (i.e., accounts receivable). Additionally, certain costs are paid in advance (prepaid expenses) and/or supply items are purchased in advance (i.e., inventories). These items create a timing difference between payment of expenses and cost recovery through service changes. Those items (commonly referred to as Working Capital needs) are noncash assets. City of Lino Lakes, Minnesota Management Report, Page 39 In addition, the Retained Earnings of the Utility Operation include the fixed assets of such operations which are depreciated and charged (annually) against income. Such =depreciated fixed assets are also a noncash asset. The following schedule has been prepared to illustrate the effects of working capital needs and fixed assets upon the total equity of the City's water and sewer operations: Water Sewer Cash and investments $1,693,516 $302,528 Working capital needs: Accounts receivable 90,357 146,177 Prepaid expenses 1,897 1,825 Due from other governments - - Payables (721,426) (29,066) Long -term payable - bonds (4,265,000) Purchased fixed assets - net 3,738,093 26,741 Retained earnings $537,437 $448,205 T City of Lino Lakes, Minnesota Management Report, Page 40 During 1996, the City issued the Water Revenue Bonds of 1996B. These bonds were issued to construct water improvements. A summary of the financial activity of these projects during 1996 is as follows: Total Costs 12/31/96 Well No. 3 pumphouse $551,869 Tower No. 2 532,247 Birch Street trunk water 618,892 Otter Lake Road trunk utilities 1,052,144 Total construction in progress 2,755,152 Contract payable at 12/31/96 (624,369) Cash outlay 2,130,783 Bond proceeds 3,283,495 Cash available for construction S1,152,712 As of December 31, 1996, the cash balance in the Water Fund was $1,693,516 of which $1,152,712 is restricted for future construction costs. City of Lino Lakes, Minnesota Management Report, Page 41 GAS UTILITY FUND Portions of the City of Lino Lakes have gas service through a franchise agreement between the City of Circle Pines and the City of Lino Lakes. The City of Circle Pines operates the gas utility. We have reviewed the initial distribution of gas franchise profits received by the City of Lino Lakes under the terms of the franchise agreement. The revenue was calculated on the following basis: 1995 1996 Residential and Commercial Revenue $388,417 @ 7% = S27,189 $528,030 @ 7% = S36,962 Interruptible Service 109,892 @ 3% = 3,297 158,455 @ 3% = 4,754 Total S498,309 30,486 $686,485 41,716 Remitted by Circle Pines Difference 30,486 41,726 SO $10 The franchise agreement allows for adjustment from gross revenue of net bad debts. The City of Lino Lakes had bad debts of $1,830 in 1995 and $850 in 1996. City of Lino Lakes, Minnesota Management Report, Page 42 Gas utility sales have been as follows: Residential Commercial Total Increase / (Decrease) Increase / (Decrease) Increase / (Decrease) Year Amount Amount Percent Amount Amount Percent Amount Amount Percent 1984 $97,007 $735 0.76% $23,829 $1,351 6.01% $120,836 $2,086 1.76% 1985 102,156 5,149 5.31% 29,356 5,527 23.19% 131,512 10,676 8.84% 1986 90,407 (11,749) (11.50)% 24,764 (4,592) (15.64)% 115,171 (16,341) (12.43)% 1987 82,787 (7,620) (8.43)% 19,866 (4,898) (19.78)% 102,653 (12,518) (10.87)% 1988 114,883 32,096 38.77% 21,845 1,979 9.96% 136,728 34,075 33.19% 1989 120,060 5,177 4.51% 21,303 (542) (2.48)% 141,363 4,635 3.39% 1990 148,802 28,742 23.94% 17,669 (3,634) (17.06)% 166,471 25,108 17.76% 1991 207,162 58,360 39.22% 20,013 2,344 13.27% 227,175 60,704 36.47% 1992 274,811 67,649 32.66% 18,092 (1,921) (9.60)% 292,903 65,728 28.93% 1993 378,573 103,762 37.76% 21,465 3,373 18.64% 400,038 107,135 36.58% 1994 359,663 (18,910) (5.00)% 17,342 (4,123) (19.21)% 377,005 (23,033) (5.76)% 1995 368,991 9,328 2.59% 21,256 3,914 22.57% 390,247 13,242 3.51% 1996 471,014 102,023 27.65% 57,866 36,610 172.23% 528,880 138,633 35.52% Bad Debts Interruptible Sales Increase / (Decrease) Increase / (Decrease) Year Amount Amount Percent Amount Amount Percent 1984 $ - $ - $ - $155,626 $9,534 6.53% 1985 149,590 (6,036) (3.88)% 1986 92,822 (56,768) (37.95) % 1987 3,334 3,334 3.25% 88,509 (4,313) (4.65)% 1988 2,757 (577) (17.31) % 83,363 (5,146) (5.81) % 1989 3,394 637 23.10% 111,977 28,614 34.32% 1990 53 (3,341) (98.44) % 108,699 (3,278) (2.93) % 1991 2,500 2,447 4616.98% 113,869 5,170 4.76% 1992 515 (1,985) (79.40)% 126,267 12,398 10.89% 1993 1,257 742 144.08% 125,360 (907) (0.72)% 1994 2,100 843 67.06% 127,204 1,844 1.47% 1995 1,830 (270) (12.86)% 109,892 (17,312) (13.61)% 1996 850 (980) (53.55)% 158,455 48,563 44.19% Prior to 1987, bad debts were netted with sales. City of Lino Lakes, Minnesota Management Report, Page 43 The City of Lino Lakes had rights to receive payment of net income after the accumulated retained earnings deficit was eliminated. Prior to 1988, the City received no such distributions. The Circle Pines gas utility has accumulated a positive retained earnings balance in excess of $1,300,000. At December 31, 1996 the Lino Lakes Franchise has a positive fund balance of $140,423. A schedule of the City of Lino Lakes fund balance for the past four years is as follows: Year Increase Amount Amount Percent 1992 $55,669 $25,596 85.11% 1993 69,368 13,699 24.61% 1994 90,630 21,262 30.65% 1995 120,046 29,416 32.46% 1996 140,423 20,377 16.97% The current franchise agreement provides a revenue source to the City of Lino Lakes. Key features of the new agreement are as follows: -` 1. Term: January 1, 1987 through March 31, 2012. 2. Revenue to the City of Lino Lakes based on 7% of sales except for interruptible sales which are based on 3 %. 3. Cancelable by the City of Circle Pines commencing on January 1, 1992. The City of Lino Lakes has the right to cancel the franchise agreement through the purchase of this system beginning on January 1, 1992. 4. Right to inspect the financial/accounting records to verify revenue calculations. 5. Revenue began accruing on January 1, 1987. Revenue will be received four and one- half months after the year end (i.e., first receipt was in May, 1988). 6. The City has the right to purchase the system at stated terms beginning on January 1, 1992. We commend the City for the successful efforts to receive a supplemental financing source for the City. The City received $41,726 in 1997 which represents the 1996 share of earnings. Earnings from inception of the new agreement total $226,951. Financial uncertainties facing metropolitan cities require diversity of revenue sources to assure adequate funding of operations without severe property tax increases. City of Lino Lakes, Minnesota Management Report, Page 44 An Agency Fund is designed to account for transactions for other individuals, private organizations and/or other funds. During 1995, the City had four Agency Funds as follows: AGENCY FUNDS • Contractor's Deposits • Pending Assessments • Investment Fund • Deferred Compensation The Contractor's Deposits Fund is used to account for "pass through" types of expenditures relating to prospective developers. The City pays certain legal, engineering and planning amounts to assure compliance with various City ordinances relating to pertinent applications. The City receives deposits and/or bills the various developers for costs incurred. We recommend that the City continue to maintain detailed records of amounts due from developers and assure that adequate deposits are received prior to incurring expenses on a developer's behalf The Pending Assessments Fund was established in 1991 to account for the prepayment of special assessments by contractors prior to the final assessment being adopted by the City Council. The Investment Fund is designed to pool all available cash balances of the City to maximize the investment efficiency of the City. Interest is allocated to funds annually based on the average cash balance of the participating funds. The Deferred Compensation Fund was established in 1987 in response to the issuance of the Governmental Accounting Standards Board (GASB) Statement No. 2. GASB Statement No. 2 requires deferred compensation plans adopted under the provisions of Internal Revenue Code Section 457 to be included in the City's Annual Financial Report. City of Lino Lakes, Minnesota Management Report, Page 45 FEDERAL SINGLE AUDIT 1 Federal regulations require a City to obtain a federal compliance audit if the City receives over $25,000 in federal funds. During 1996, the City of Lino Lakes received $102,792 of federal funds as follows: Grant Amount COPS FAST $58,047 Oak Wilt Cooperative Suppression Program 3,300 CDBG - Small Cities Program 41,445 Total $102,792 We have completed the federal compliance audit as required and issued our reports under a separate cover. City of Lino Lakes, Minnesota — Management Report, Page 46 CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING 1 The City submitted the 1995 Comprehensive Annual Financial Report (CAFR) to the — Government Finance Officers Association of the United States and Canada for a comprehensive review. The CAFR is reviewed by two individuals and graded in ten different categories. The — CAFR must receive a unanimous approval of both reviewers. The City received the award for their 1995 CAFR. We commend the City for this achievement. GOVERNMENTAL ACCOUNTING STANDARDS UPDATE 1 — The Governmental Accounting Standards Board (GASB) has issued its Exposure Draft document on the Governmental Financial Reporting Model. This document proposes significant changes in governmental accounting which will impact internal financial accounting and external financial reporting of the City. A summary of the key provisions of the preliminary views document is presented below: • Fund Perspective Financial Statements. These financial statements would be similar to — current financial statements with modified accrual basis of accounting for governmental funds, accrual basis of accounting for business type activities (formerly enterprise and internal service funds). However, the GASB proposes a new definition for fiduciary funds and the elimination of the account groups. • Entity -wide Perspective Financial Statements. These financial statements include full — accrual accounting for all activities. The income statement will be replaced by a statement of activities using the net program cost format. Additionally, capital use charges — (depreciation) on general fixed assets and infrastructure assets will be required to be reported in the financial statements. City of Lino Lakes, Minnesota Management Report, Page 47 • Management's Discussion and Analysis of Financial Condition and Results of Operations (MD &A). The MD &A letter will be similar to (although will not replace) the current letter of transmittal. Currently, Securities and Exchange Commission (SEC) regulations require private sector registrants to provide a MD &A letter discussing financial conditions, results of operations, etc. I SUMMARY 1 During 1997, we recommend that the City: * Continue to monitor actual versus projected area and unit assessment collections to assure that the debt payment requirements will be met in the Area and Unit Charge Fund. (Page 25) * Determine a funding source for the fund deficit and close this fund once the projects are completed. (Page 30) * Continue to maintain detailed records of amounts due from developers and assure that adequate deposits are received prior to incurring expenses on a developer's behalf. (Page 44)