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HomeMy WebLinkAboutOther Auditor Reports 12/31/2003CITY OF LINO LAKES, MINNESOTA OTHER AUDITOR REPORTS YEAR ENDED DECEMBER 31, 2003 CITY OF LINO LAKES, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2003 Page Independent Auditors' Report on Compliance and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 1 -2 Independent Auditors' Report on Legal Compliance 3 Other Required Auditor Communications 4 -6 Management Letter 7 -11 w Imo w Mow — - LarsonAllerf CPAs, Consultants & Advisors www.larsonallen.com INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota We have audited the financial statements of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2003 and have issued our report thereon dated March 25, 2004. We conducted our audit in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Govemment Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the City of Lino Lakes, Minnesota's 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 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 Govemment Auditing Standards. Internal Control over Financial Reporting In planning and performing our audit, we considered the City of Lino Lakes, Minnesota's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements and not to provide assurance on the internal control structure over financial reporting. 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 material weaknesses. 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 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. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. However, we noted other matters involving the internal control over financial reporting, which we have reported to management in a separate letter dated March 25, 2004. (1) Larson, Allen, Weishair & Co., LLP 1 An Independent Member of Baker Tilly International This report is intended solely for the use of the City of Lino Lakes, Minnesota, the Office of the State Auditor, and other state and federal awarding agencies, and is not intended to be and should not be used by anyone other than these specified parties. Austin, Minnesota March 25, 2004 r / LARSON, ALLEN, WEISHAIR & CO., LLP (2) LarsonAllen" CPAs, Consultants & Advisors www.larsonallen.com INDEPENDENT AUDITORS' REPORT ON LEGAL COMPLIANCE Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota IMINP We have audited the financial statements of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2003, and have issued our report thereon dated March 25, 2004. We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards applicable to financial audits contained in Governmental Auditing standards, issued by the Comptroller General of the United States, and the provisions of the Minnesota Legal Compliance Audit Guide for Local Government, promulgated by the State Auditor pursuant to Minn. Stat. §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 six main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, and miscellaneous provisions. Our study included all of the listed categories. The results of our tests indicate that, with respect to the items tested, the City of Lino Lakes, Minnesota complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the use of the City of Lino Lakes, Minnesota, the Office of the State Auditor, and other state agencies, and is not intended to be and should not be used by anyone other than these specified parties. Austin, Minnesota March 25, 2004 s LARSON, ALLEN, WEISHAIR & CO., LLP (3) Larson, Allen, Weishair & Co., LLP 1 An Independent Member of Baker Tilly International WNW IMMO Yaw flaw LarsonAlled CPAs, Consultants & Advisors www.larsonallen.com OTHER REQUIRED AUDITOR COMMUNICATIONS Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota Dear Committee Members: We have audited the financial statements of the City of Lino Lakes for the year ended December 31, 2003, and have issued our report thereon dated March 25, 2004. Professional standards require that we provide you with the following information related to our audit. Our Responsibility Under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated December 10, 2003, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting principles. Because an audit is designed to provide reasonable assurance, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. As part of our audit, we considered the internal control structure of the City of Lino Lakes. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such intemal control structure. Other Information in Documents Containing Audited Financial Statements Our responsibility for other information in documents containing the City of Lino Lakes financial statements, including the supplementary information, does not extend beyond the information identified in our report on the financial statements, and we have no professional responsibility to perform audit procedures on such other information. (4) Larson, Allen, Weishair & Co., LLP 1 An Independent Member of Baker Tilly International Significant Accounting Policies Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Lino Lakes are described in Note 1 to the financial statements. During the year ended December 31, 2003, the City of Lino Lakes, Minnesota adopted Governmental Accounting Standards Board No. 34, Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments. The implementation of GASB Statement No. 34 caused the opening fund balance at December 31, 2002, to be restated in terms of "net assets" as explained further in Note 1. We noted no transactions entered into by the City during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Management's estimate of the cost of infrastructure (streets, storm sewers, and trails) is based on the current replacement cost of such infrastructure deflated to the year of construction using price indexes. We evaluated the key factors and assumptions used to develop the estimated cost of the City's infrastructure in determining that it is reasonable in relation to the basic financial statements taken as a whole. Annual depreciation is provided using rates sufficient to fully depreciate the related fixed assets over their useful lives based on past experiences. The year end valuation of investments at fair value. The City has recognized a liability for earned sick leave benefits. The amount recorded includes amounts earned through December 31, 2003 by employees eligible for retirement at that date. In addition, an amount is recorded for those individuals not eligible for retirement at December 31, 2003, but for whom pay-out of the amount earned to that date is reasonably expected. This estimate is derived by an analysis of the pay-out history and current and anticipated future employment conditions. We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. Significant Audit Adjustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future financial statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's financial reporting process. Management did not identify and we did not notify them of any uncorrected financial statement misstatements. (5) Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditors' report. We are pleased to report that no such disagreements arose during the course of our audit. Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditors' opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Issues Discussed Prior to Retention of Independent Auditors We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management prior to retention as the City's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing our audit. This information is intended solely for the use of the Finance Committee, Board of Directors, and management of the City of Lino Lakes and is not intended to be, and should not be used by anyone other than these specified parties. Austin, Minnesota March 25, 2004 Now Wee.; LARSON, ALLEN, WEISHAIR & CO., LLP (6) Vow LarsonAlled CPAs, Consultants & Advisors www.larsonallen.com Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota In planning our audit of the financial statements of the City of Lino Lakes as of and for the year ended December 31, 2003, we considered its internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control. We noted no matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect City's ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. Our consideration of internal control would not necessarily disclose all matters in internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. During the course of our audit, several items came to our attention that we feel could be addressed by the City of Lino Lakes to more efficiently run the City's operations or improve its internal controls. We herein submit the following suggestions to the City of Lino Lakes for their consideration. Auditor Comments: Capital Project Deficits The financial statements for the capital project funds are presented in Statements 3, 5, 12 and 13 of the 2003 Annual Financial Report. As of December 31, 2003 many of the capital project funds have deficit fund balances. These deficits total $5,553,381. The fund balances at December 31, 2003 and 2002 for these funds are as follows: Fund Dedicated Parks MSA Construction 1997 Construction 1998 Construction Town Center Project Tax Increment # 1 -7 Tax Increment # 1 -8 Tax Increment # 1 -10 Tax Increment # 1 -11 Fund Balance (Deficit) December 31, 2002 $ (740,518) $ (364,332) (698,540) (2,662,115) (1,081,320) (26,695) (14,428) 2003 (699,225) (391,389) (698,540) (2,662,115) (1,081,320) (13,060) (6,120) (1,612) $ (5,587,948) $ (5,553,381) (7) Larson, Allen, Weishair & Co., LLP 1 An Independent Member of Baker Tilly International Increase (Decrease) 41,293 (27,057) 26,695 1,368 (6,120) (1,612) $ 34,567 The City needs to review each of these funds to determine how the deficits will be eliminated. In some cases, transfers from other funds may be needed to eliminate the deficits. These transfers should be made as soon as the amount can be determined so as not to overstate the fund balances in the transferring funds. We also recommend that the City close funds once the related projects are complete. SAC Revolving The SAC Revolving Fund was established in 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 2003 Total Revenue SAC refund $ 368,816 $ - $ 368,816 Investment earnings 246,626 3,265 249,891 Total revenue 615,442 3,265 618,707 Expenditures: Refunds $ 248,576 $ 3,832 252,408 Fund balance - December 31, 2003 $ 366,299 The City is allowing current homeowners to request a refund with 4% interest. If refunds and claims are not submitted, the City will pay the full SAC charge from this fund at the time of hook -up. This policy will likely require a supplemental future revenue source as the current MCES SAC charges times the potential hookups exceeds the available balance. If the MCES SAC fees continue to increase at a rate that is faster than the investment earnings rate, other revenue sources will be needed in the future to fund the actual connections when they occur. Area and Unit Charge Fund On January 11, 1988, the City Council approved Resolution 1 -88, which established the Area and Unit Charge Fund for the City. The purpose of this fund is to collect various area and unit charges to be used to meet debt payments. Before October 1 of each year, the City estimates the required transfer needed to meet debt payments for the subsequent year. In December, these estimated amounts are transferred to the various debt funds. We recommend that the City continue to closely monitor actual versus projected area and unit assessment collections to assure that debt payment requirements will be met. Designations of balances required for debt service is necessary to define discretionary construction balances available to the City. The financing plan for the following bond issues have pledged area and unit charges for the repayment of debt service: • Improvement Refunding Bonds of 1999A • Improvement Bonds of 1996A • Water Revenue Bonds of 1999B • Water Revenue Bonds of 1996B (8) The Improvement Refunding Bonds of 1999A and the Improvement Bonds 1996A have future debt service requirements (principal and interest) totaling $1,144,773 and $1,609,630, respectively. During 2003, transfers of $391,554 and $276,656 were made to the Improvement Refunding Bonds of 1999A debt service fund and the Improvement Bond of 1996A debt service fund, respectively. The Water Revenue Bonds of 1999B and 1996B have future debt service requirements totaling $573,893 and $3,179,748 (principal and interest). The City annually transfers amounts from the Area and Unit Charge Fund to the Water Fund sufficient to help cover the debt services of these bonds. - During 2003, a transfer of $301,355 was made to the Water Fund. It is the City's intention to repay the Water Revenue Bonds of 1999B and 1996B with revenues of the - Water Fund. If revenues are not sufficient to meet the debt requirements, funds will be transferred from the Area and Unit Charge Fund. - DEBT SERVICE FUNDS Debt service funds are a type of governmental fund used to account for the accumulation of resources for the payment of principal and interest on general obligation debt (other than enterprise fund debt). Debt service funds may have one or a combination of revenue sources pledged to retire debt including property taxes, tax increments, special assessments and area and unit charges. The diverse nature of the type of debt included in the same fund type requires careful analysis to determine the adequacy of the fund balance and projected fund balance. The following schedule extracts information from Exhibits 1, 2 and 3 of the 2003 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 (at least on a preliminary basis) the financial position of each individual debt service fund. December 31, 2003 Remaining Scheduled Final Fund Deferred Debt Service Property Maturity Fund Description Balance Revenue Total Scheduled Taxes Date General Debt: Certificates of Indebtedness $ 84,095 $ 5,853 $ 89,948 $ 590,550 $ 620,078 12/31/05 Lease Revenue Bonds of 1998A 890,557 6,158 896,715 4,406,525 6,521,892 02/01/10 99C Public Project Revenue Bonds 319,833 2,221 322,054 796,778 495,466 02/01/10 $ 1,294,485 $ 14,232 $ 1,308,717 $ 5,793,853 $ 7,637,436 Special Assessment Debt: Improvement Bonds of 1996A $ 433,511 $ 30,652 $ 464,163 $ 1,609,630 $ 02/01/04 Improvement Bonds of 1998A 14,451 190,060 204,511 4,406,525 02/01/15 Improvement Bonds of 1998B 340,930 331,196 672,126 2,171,896 1,702,463 02/01/15 Refunding Imp. Bonds of 1999A 119,619 14,420 134,039 1,144,773 808,669 02/01/06 Improvement Bonds of 2002A 205,355 448,598 653,953 728,380 53,142 02/01/12 Improvement Bonds of 20028 521,795 1,590,050 2,111,845 2,696,010 02/01/13 - Improvement Bonds of 2003A 226,755 344,056 570,811 2,454,151 02/01/19 Improvement Bonds of 2003B 692 135,074 135,766 331,285 02/01/14 $ 1,863,108 $ 3,084,106 $ 4,947,214 $ 15,542,650 $ 2,564,274 IMMO Note: Deferred revenue in the above table does not include the future scheduled "interest portion" of the adopted assessment rolls. The 1996A and 1999A Improvement Bonds also include a pledge from the Area and Unit Fund that has not been included above. The above table provides a means for the monitoring the status of the debt service funds. For the General Debt funded solely by property taxes, it appears that there are adequate planned levies to - retire the debt when the future lease revenues scheduled to be received from the school district are included. (9) DEBT SERVICE FUNDS (Continued) Schedule of Special Assessment Debt: Total resources available + Scheduled property tax levies $ 4,947,214 2,564,274 $ 7,511,488 - Debt Service 15,542,650 Deficit in scheduled funding (at 12/31/03) $ (8,031,162) This deficit will need to be funded by future adopted assessment rolls, special assessment levies, investment earnings, transfers from other funds, property taxes or other available means. Factors to consider when analyzing debt service funds: • Are all the anticipated assessment rolls being adopted as soon as appropriate? • Have all the planned financing sources been identified, such as pledged amounts from the area and unit fund or future MSA funds? • Are there significant "prepayments" received from property owners? In the current investment environment, will the earnings the City will receive on these prepayments be lower than the interest rate that was being charged on the adopted assessment roll? We recommend that all Debt Service Funds of the City be reviewed at least annually by applying the above criteria. The Area & Unit Fund is committed to the debt service of some special assessment bonds as well as toward the water revenue bonds. We recommend that the City determine the full commitment of the Area and Unit Fund whenever this fund is used to pledge toward future bond issues and construction projects. Undeveloped Special Assessments As noted above in the discussion of Capital Project Deficits and Debt Service Funds, the City has many funds with current deficits or projected deficits. City staff believes many of these deficits will be eliminated as various properties are developed and can be assessed for improvements that have already been made. Currently, the City Charter allows property owners to defer special assessments on undeveloped property until it is developed and owners are using applicable services. As noted above, this results in cash flow problems for the City and can provide a road block for future expansion. We feel the City should review its Charter in regards to assessments on undeveloped property. We have seen some cities adopt a policy of only deferring assessments for a short period, say two to five years. If the City feels the Charter should not be changed, then it needs to re -think how it will pay for future projects. One possibility is to require developers to pay a larger share of infrastructure improvements. Another possibility is for the Area and Unit Fund or General Fund to loan the money to the applicable project. These funds would be paid back when the applicable properties are actually assessed. The key is the project should not get done unless the City has a plan for covering the costs of the project. (10) DEBT SERVICE FUNDS (Continued) Developer Escrow Accounts The City maintains an Agency Fund to account for the activity related to developer escrows. It is our understanding that developers deposit an escrow prior to a project beginning and that certain costs may be applied against this escrow. We noted that there are several escrow accounts that carry a "negative" balance, which represents an additional receivable balance from the developer. We recommend that the City monitor these escrow balances and if they go negative that the developer be contacted so that an additional deposit can be made. Conclusion We welcome the opportunity to discuss the points mentioned in this letter or any other accounting and procedural issues in order to coordinate our efforts with you, the mutual objective being the development of more effective accounting procedures for the City. We understand that some of the aforementioned points are in the process of implementation or may already have been implemented; however, these points are noted so that effective follow -up can be accomplished. We sincerely appreciate all the courtesies and cooperation extended to us by you and the staff of the City, and thank you for the opportunity to be of service to you. We look forward to working with you in the future. This report is intended solely for the information and use of the City, management, the City Council and others within the administration and is not intended to be and should not be used by anyone other than these specified parties. Austin, Minnesota March 25, 2004 OEM Z /jt/vs`"i L L, LARSON, ALLEN, WEISHAIR & CO., LLP