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Other Auditor Reports 12/31/2001
CITY OF LINO LAKES, MINNESOTA OTHER AUDITOR REPORTS FOR THE YEAR ENDED DECEMBER 31, 2001 CITY OF LINO LAKES, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2001 Page 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 1-2 — Independent Auditor's Report on Legal Compliance 3 Other Required Auditor Communications 4-7 Management Letter 8 -15 LarsonAllerf Weishair & Co., LLP ACHIEVE THE DESIRED EFFECT"' Business Consultants Certified Public Accountants 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 Honorable Mayor and City Council City of Lino Lakes, Minnesota We have audited the general purpose financial statements of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2001 and have issued our report thereon dated March 28, 2002. We conducted our audit in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 Government Auditing Standards. Internal Control over Financial Reporting In planning and performing our audit, we considered the City of Lino Lakes, Minnesota's intemal control over financial reporting 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 structure over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the intemal 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 28, 2002. (1) 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 28, 2002 (2) LARSON, ALLEN, WEISHAIR & CO., LLP Larson Allen' Weishair & Co., LLP ACHIEVE THE DESIRED EFFECT" Business Consultants Certified Public Accountants INDEPENDENT AUDITOR'S REPORT ON LEGAL COMPLIANCE To the Honorable Mayor and City Council City of Lino Lakes, Minnesota We have audited the general purpose financial statements of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2001, and have issued our report thereon dated March 28, 2002. We conducted our audit in accordance with generally accepted auditing standards and the provisions of the Minnesota Legal Compliance Audit Guide for Local Govemment, promulgated by the Legal Compliance Task Force 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 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 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 28, 2002 (3) '4/46frf q- I/? LARSON, ALLEN, WEISHAIR & CO., LLP Larson Weishair & Co., LLP ACHIEVE THE DESIRED EFFECT"' Business Consultants is Certified Public Accountants OTHER REQUIRED AUDITOR COMMUNICATIONS March 28, 2002 To the Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota Dear Committee Members: We have audited the general purpose financial statements of the City of Lino Lakes for the year ended December 31, 2001, and have issued our report thereon dated March 28, 2002. 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 3, 2001, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether the general purpose financial statements are free of material misstatement. Because of the concept of reasonable assurance and because we did not perform a detailed examination of all transactions, there is a risk that material errors, irregularities, or illegal acts, including fraud and defalcations, 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 conceming 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) 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 general purpose financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2001. 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. Management Judgments and Accounting Estimates Accounting estimates are an integral part of the general purpose financial statements prepared by management and are based on management's current judgments. 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 management's current judgments. Significant accounting estimates include the following: Annual depreciation is provided in the proprietary funds 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 records allowances for uncollectible receivables based upon an analysis of the collectibility of individual accounts and notes, taking into account delinquencies and payment histories. The City has recognized sick leave payable in the general long-term debt account group. The amount recorded includes amounts earned through December 31, 2001 by employees eligible for retirement at that date. In addition, an amount is recorded for those individuals not eligible for retirement at December 31, 2001, 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. Significant Audit Adjustments For purposes of this letter, professional standards define a significant audit adjustment as a proposed correction of the general purpose financial statements that, in our judgment, may not have been detected except through our auditing procedures. Those adjustments may include those proposed by us but not recorded by the City that could potentially cause future financial statements to be materially misstated, even though we have concluded that such adjustments are not material to the current financial statements. We proposed no audit adjustments that could, in our judgment, either individually or in the aggregate, have a significant effect on the City's financial reporting process. We also accumulated potential adjustments, which were discussed with management, that we considered both individually and collectively immaterial and, therefore, were not made to the financial statements. These potential adjustments are summarized in the attached schedule. (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 general purpose financial statements or the auditor's 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 of obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's general purpose financial statements or a determination of the type of auditor's 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 for any other purpose. Sincerely, .,1_,444400-7 - LARSON, ALLEN, WEISHAIR & CO., LLP (6) CO z U. LIJ w z re ci:suJ ,0 5 (7) co 0 0 < co Z -71 LO cl; 0 r.) (i) < I- 0 coCI) LL. 0 >- re w I— 2 LLI 0 Z 0 w 0 z w a. (NI 69 1•• 0 EN 0 < 0 < OVER (UNDER)-STATEMENT OF NS CAPTION 0 LLJ D 1••• 69 r- 0 c) cu 8 a) co 0 Z 0 _ E5 aj u_ a_ u_ 0 w a co c 1:7 69 69 (NI t- o (NI co 1.6 69 cl 03 0 Prior Year Adjustments Passed: Cumulative Net Audit Differences F/S Caption Totals % of F/S Caption Total 0 11 g 9 Larson Allen' Weishair & Co., LLP ACHIEVE THE DESIRED EFFECT' Business Consultants oi Certified Public Accountants To the Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota In planning our audit of the General purpose financial statements of the City of Lino Lakes as of and for the year ended December 31, 2001, we considered its internal control structure 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 structure. 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 13 and 14 of the 2001 Annual Financial Report. As of December 31, 2001 many of the capital project funds have deficit fund balances. These deficits total $4,404,882. The fund balances at December 31, 2001 and 2000 for these funds are as follows: Fund Dedicated Parks MSA Construction 1997 Construction 1998 Construction Town Center Project Lake/Apollo Dr Improvement Market Place Tax Increment Administrative Tax Increment # 1-5 Tax Increment # 1-7 Tax Increment # 1-8 Fund Balance (Deficit) December 31, 2001 2000 (155,052) (425,143) (1,374,287) (2,839,838) (1,690) (12,974) (421,838) (5,230,822) (397,460) (438,615) (343,018) (2,661,374) (29,501) (360,084) (17,726) (138,243) (18,861) (4,404,882) Increase (Decrease) $ (242,408) (13,472) 1,031,269 178,464 (27,811) (360,084) 12,974 (17,726) 283,595 (18,861) 825,940 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. (8) The major increase in the 1997 Construction Fund is due to billing Anoka County $1,032,516 for their share of the cost related to realignment of Otter Lake Road, Anoka County's share had been originally estimated to be $677,000. Anoka County is reviewing those costs and has not paid the City as of the audit date. Town Center Construction Fund Over the past four years, the City has purchased two different parcels in the "Village Area" of Lino Lakes for the purpose of reselling the property for development. A third parcel was traded for the land the Civic Complex is located on. Future and sales are intended to cover the purchase of these three parcels. In addition, the proceeds from the sale of the former police station land and adjacent lots will also go toward covering these costs after repaying an interfund loan made by the Water and Sewer Fund in 1998. The total amount of the costs incurred on the acquisition of these parcels and the costs associated with them through the end of 2001 is $2,118,143. Two of these parcels were financed with contracts for deed; as of 12/31/01, the remaining principal balance of the two contracts is approximately $859,352. Summary of Activity Description of Expenditure 1996 - 1999 2000 2001 Total Capital Outlay (inc.land) $ 1,897,522 $ (120,000) $ $ 1,777,522 Interest expense 30,128 27,811 27,811 85,750 Engineering 50,009 - 50,009 Professional services 190,147 190,147 Legal 14,172 14,172 Other 374 169 543 $ 2,182,352 $ (92,020) $ 27,811 $ 2,118,143 Revenues Net land sale proceeds 158,257 - 158,257 Remaining deficit $ (2,024,095) $ 92,020 $ (27,811) $ (1,959,886) Note: the expenditures above do not include any accrued interest on the Rehbien contract. The interest (and principal portion) will be paid as land is sold. At the end of 2001, the accrued interest is approximately $165,000. When future payments are made the payments will be applied first to accrued interest and the remainder then applied to the principal balance. There are approximately 11.5 developable acres that remain for sale, including the 3 acres from the former police station land. The above deficit of $1,959,886 (in addition to any other costs that are charged to this project in future years) will need to be funded from either land sales or other revenue sources, if the revenues generated from the land sales are not sufficient. The following table calculates what the "breakeven" price on the remaining "Rehbein" and "Funkhouser" parcels will need to be to cover the costs incurred through the end of 2001. In addition to these costs, the sale prices will need to be sufficient to cover any additional costs that will be incurred in future years; including interest that will be paid as the land is sold. Assuming that the land remaining near the former police station land is sold for the appraised value of $82,500 per acre, the remaining parcels will need to be sold for an average of $6.15 per square foot, or approximately $268,000 per acre in order to cover costs incurred through the end of 2001. (9) Town Center Construction Fund (Continued) Current deficit to cover Plus: Accrued interest through 12/31/01 Repayment of interfund loan Less: Proceeds from sale of "Former Police Station Site" (3 acres © $82,500/acre) $ 1,959,886 165,000 130,634 (247,500) Equals Cost to be recovered in Town Center Project $ 2,008,020 "Hotel site" "Retail strip on north end of Rehbien parcel" Remaining Acres to sell 4.5 acres 3.0 acres Approximate price per acre needed (through 2001) Approximate price per foot needed (through 2001) 7.5 ====»› 7.5 $ 267,736 $ 6.15 We recommend that the City continue to closely monitor the status of the Town Center Fund and identify other revenue sources if and when it is determined they are needed. 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 2001 Total Revenue SAC refund $ 368,816 $ - $ 368,816 Investment earnings 227,015 11,574 238,589 Total revenue 595,831 11,574 607,405 Expenditures: Refunds 236,174 7,179 243,353 Fund balance - December 31, 2001 364,052 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. (10) 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 Refunding Bonds of 1996A • Water Revenue Bonds of 1999B • Water Revenue Bonds of 1996B The Water Revenue Bonds of 1999B and 1996B have future debt service requirements totaling $799,215 and $3,785,174 (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 2001, a transfer of $307,650 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 The combining financial statements for the debt service funds are presented in Statements 11 and 12 of the 2001 Annual Financial Report. 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 2001 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. DEBT SERVICE FUNDS (Continued) December 31, 2001 Remaining Scheduled Final Fund Deferred Debt Service Property Maturity Fund Description Balance Revenue Total Scheduled Taxes Date General Debt: Certificates of Indebtedness $ 66,278 $ 3,139 $ 69,417 $ 734,544 $ 771,901 12/31/03 Lease Revenue Bonds of 1998 866,464 2,492 868,956 8,008,652 7,206,739 02/01/10 99C Public Project Revenue Bonds 316,355 1,019 317,374 1,040,958 733,498 02/01/10 $ 1,249,097 $ 6,650 $ 1,255,747 $ 9,784,154 $ 8,712,138 Special Assessment Debt: Improvement Bonds of 1996A 127,023 $ 126,020 $ 253,043 $ 2,925,765 02/01/07 Improvement Bonds of 1998A (41,953) 641,119 599,166 5,330,775 02/01/15 Improvement Bonds of 1998B 296,258 338,106 634,364 2,557,052 2,006,928 02/01/15 Refunding Imp. Bonds of 1999A 96,024 32,180 128,204 1,927,008 1,646,682 02/01/06 477,352 1,137,425 $ 1,614,777 $ 12,740,600 3,653,610 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. Schedule of Special Assessment Debt: Total resources available + Scheduled property tax levies $ 1,614,777 3,653,610 $ 5,268,387 - Debt Service 12,740,600 Deficit in scheduled funding (at 12/31/01) $(7,472,213) 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? • Have the scheduled debt service payments been scheduled around the anticipated assessment rolls in addition to any anticipated prepayments to avoid accumulating excess balances and generating excess earnings that potentially could be subject to arbitrage? (12) DEBT SERVICE FUNDS (Continued) 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. Developer Escrow Accounts The City maintains a Trust and 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. Reporting Model The Governmental Accounting Standards Board (GASB) has issued Statement No. 34 on issues related to the Governmental Financial Reporting Model. The implementation date for an organization the size of the City is the year 2003. This new reporting model significantly changes governmental accounting, which will impact the internal financial accounting and external financial reporting of the City. As a result, it will involve a significant commitment of time by the finance department staff. A summary of the key provisions of the statement is presented below: Key features of the new model. Even though the new governmental financial reporting model has deep roots in traditional public sector accounting and financial reporting, it offers many new features. The most important of these new features are: • Government-wide financial reporting. For the first time, users of state and local government financial reports have access to government-wide financial statements that provide a clear picture of the government as a single, unified entity. These new government-wide financial statements complement rather than replace traditional fund-based financial statements. • Additional long-term focus for governmental activities. Traditional reporting for tax-supported (governmental) activities has focused on near-term inflows, outflows, and balances of spendable financial resources. The new financial reporting model retains this short-term focus in the governmental fund financial statements while providing a long-term perspective on these same activities in the government-wide financial statements. • Narrative overview and analysis. The new governmental financial reporting model provides financial report users with a simple narrative introduction, overview, and analysis of the basic financial statements in the form of management's discussion and analysis (MD&A). (13) Reporting Model (Continued) • Information on major funds. It is widely agreed that fund information is most useful when presented for individual funds rather than for aggregations of funds (e.g., all special revenue funds). Accordingly, the new governmental financial reporting model presents individual fund data for each of a government's major funds. • Expanded budgetary reporting. In the past, budgetary comparisons were based solely on the final amended budget. Under the new governmental financial reporting model, information on the original budget is also presented. In addition, the new model eliminates aggregated budget presentations (e.g., totals for all budgeted special revenue funds) in favor of comparisons for the general fund and each individual major fund. Infrastructure reporting. As with any major change, adoption of a new governmental financial reporting model sparked some controversy. Specifically, many preparers of state and local government financial statements generally supported the new model but were not persuaded that the proposed benefits of capitalizing and depreciating a government's general infrastructure assets (e.g., roads, bridges, dams) outweigh the related costs. Accordingly, the Government Finance Officers Association (GFOA) has formally taken the position that each government must make its own decision on whether to comply with the infrastructure reporting provisions of GASB Statement No. 34 based on its own evaluation of the relative costs and benefits of infrastructure reporting. For governments that elect to implement the infrastructure reporting provisions of GASB Statement No. 34, GFOA recommends adopting a least-cost implementation strategy consistent with the provisions of that statement. The practical application of such a strategy would reflect the following recommendations: • Limit the retroactive reporting requirements for infrastructure to major classes of infrastructure assets. • Define major classes of infrastructure as narrowly as possible. • Limit infrastructure reporting to assets acquired during fiscal years ended after June 30, 1980. • Use estimates whenever possible. Use composite approaches to calculate depreciation expense. 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. (14) 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, its management, the City Council and others within the administration. Austin, Minnesota March 28, 2002 (15) lovofefr.v: e,-&-e*; LARSON, ALLEN, WEISHAIR & CO., LLP