HomeMy WebLinkAboutManagement Report and Recommendations 12/31/1986CITY OF LINO LAKES, MINNESOTA
MANAGEMENT REPORT AND RECOMMENDATIONS
DECEMBER 31, 1986
VOTO, TAUTGES, REDPATH & CO., LTD.
CERTIFIED PUBLIC ACCOUNTANTS
V1:K.
Birch Lake Professional Building • 1310 E. Hwy. 96 • White Bear Lake, MN 55110 • Phone 426 -3263
To the Honorable Mayor and
Members of the City Council
City of Lino Lakes, Minnesota
ROBERT J. VOTO, CPA
ROBERT G. TAUTGES, CPA
JAMES S. REDPATH, CPA
The Annual Financial Report of the City is complete and has been transmitted to
the City Council. In conjunction with our examination of the financial statements,
we have prepared this report to assist the City in the analysis of:
• Financial results.
• Financial trends.
• Internal control systems (and weaknesses, if any).
• The fund balances of the various funds of the City.
• Compliance procedures related to Federal and State regulations
and /or statutes as they directly relate to financial matters.
• Actual and potential effects of State legislation regarding
the financing of City government.
Based on the above areas, 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 the contents of this report with the City
Council upon request.
STATE LEGISLATION - EFFECTS ON FINANCING LOCAL GOVERNMENT
The 1987 State legislature has reviewed proposed changes to the property tax
system and the method of calculating State aids for local governments. The proposed
legislation would have significant effects on how cities receive revenue to carry out
basic services. The most significant proposals (related to property taxes) have been
tabled for consideration at a future session. It appears that the 1987 legislation
will not reduce 1987 local government aid. The law will, however, freeze 1988 local
government aid at the 1987 level. Additionally, it appears as though extremely
restrictive legislation has been approved affecting the overall levy increase
(excluding debt) to 3% of the 1987 revenue base (levies and local government aid).
We recommend that the City review the provisions (and exceptions) of this legislation
to prepare for the 1988 levy /budget process.
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS • PRIVATE COMPANIES PRACTICE SECTION
MINNESOTA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
GOVERNMENT FINANCE OFFICERS ASSOCIATION • MINNESOTA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS
City of Lino Lakes, Minnesota
Management Report, Page 2
General and Special Revenue Funds
The General and Special Revenue Funds of the City are maintained to account for the
current and capital outlay expenditures that are common to cities. The City maintains a
General Fund and a Special Revenue Fund (Revenue Sharing). Financial reporting stan-
dards in effect allow a city to reasonably compare its financial operations with its
prior year or other similar cities.
Total revenue for these funds for the past three years have been as follows:
Local taxes
Licenses and permits
Intergovernmental revenue:
State
Federal
Charges for services
Court fines
Interest on investments
Other
Totals
1986
Amount Percent
$ 585,137 41.77%
137,879 9.84
491,185 35.07
28,358 2.02
59,249 4.23
65,369 4.67
17,371 1.24
16,204 1.16
1985
Amount
$ 550,302
110,343
Percent
39.86%
7.99
455,467 32.98
41,693 3.02
98,179 7.11
68,492 4.96
7,356 .53
49,009 3.55
1984
Amount Percent
$ 510,245 44.05%
91,332 7.88
403,127
36,227
75,254
26,784
3,607
11.791
34.80
3.13
6.50
2.31
.31
1.02
$1,400,752 100.00% $1,380,841 100.00% $1,158,367 100.00%
$600,000
$500,000
$400,000
$300,000
$'200,000
$100,000
$0
General & Special Revenue Funds
Property
Taxes
State Aids Licenses Charges
& Permits for
Services
■ 1984 ED 1985
Federal
revenue
1986
Court
Fines
Interest &
All Other
City of Lino Lakes, Minnesota
Management Report, Page 3
Since 1979, State aids and local
property taxes
the City of Lino Lakes were as follows:
State
Year Amount
1979 $184,184
1980 239,622
1981 300,971
1982 283,089
1983 349,076
1984 403,127
1985 455,059
1986 491,041
Aids
Percent
35.05%
39.57
41.92
36.63
37.50
34.80
32.96
35.06
used to finance the General Fund of
Property Taxes
Amount Percent
$166,149 31.62%
171,440 28.32
212,914 29.78
305,804 39.57
355,684 38.21
510,245 44.04
550,302 39.86
585,137 41.77
A graph of the above primary funding sources is as follows:
Total
Amount Percent
$ 350,333 66.67%
411,062 67.89
513,885 71.70
588,893 76.20
704,760 75.71
913,372 78.84
1,005,361 72.82
1,076,178 76.83
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1980
General & Special Revenue Funds
1981 1982
1983 1984
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1985 1986
El Other Aids
Homestead
Credits
• Local •ir Property Taxes
Government Aid
City of Lino Lakes, Minnesota
Management Report, Page 4
The above total State aids consist of the following amounts:
State Aids 1980 1981 1982 1983 1984 1985 1986
Local Government Aid $146,504 $157,862 $148,794 $171,011 $185,196 $196,177 $219,728
Homestead Credits 78,792 112,911 111,829 139,767 188,906 227,711 238,336
Police Aid 11,296 12,188 14,326 14,245 13,970 13,509 18,722
MSA - Streets 8,080 -0- 13,110 13,935 13,935 13,935
Other Aids 3,030 9,930 8,140 10,943 1,120 3,727 320
Totals $239,622 $300,971 $283,089 $349,076 $403,127 $455,059 $491,041
Percent change
25.60% (5.94%) 23.31% 15.48% 12.88% 7.91%
A graph of the above state aids compared to property taxes is as follows:
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
General & Special Revenue Funds
1980 1981 1982 1983 1984 1985 1986
II State Aids
0 Property Taxes
City of Lino Lakes, Minnesota
Management Report, Page 5
Total expenditures for the General and Special Revenue Funds for the past three
years have been as follows:
1986 1985 1984
Amount Percent Amount Percent Amount Percent
Current:
General government $ 363,256 26.37% $ 290,098 25.31% $ 259,556 25.74%
Public safety 464,499 33.73 429,545 37.48 382,907 37.97
Highways and streets 344,767 25.03 287,822 25.11 279,375 27.70
Parks 74,144 5.38 64,261 5.60 49,744 4.93
Other 10,149 .73 15,320 1.34 10,050 1.00
Capital outlay 120,448 8.76 59,089 5.16 26,875 2.66
Totals $1,377,263 100.00% $1,146,135 100.00% $1,008,507 100.00%
The increase in capital outlay for 1986 is primarily due to the accounting treatment
applied to the purchase of the fire hall. Generally Accepted Accounting Principles
require the total cost of the fire hall be recognized in the current year even though
the City will be making contract payments over a period of five years.
A graphic illustration of the above expenditures is as follows:
$500,000
$450.000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
General r. Special Revenue Funds
General
Government
Public Safety Highways & Park.
Streets
11 1984 0 1985 0 1986
Capital Outlay
& Other
Details of the above expenditure categories are presented in Statements 7 and 9 of
the Annual Financial Report.
City of Lino Lakes, Minnesota
Management Report, Page 6
Combined Financial Statements
The Combined Financial Statements of the City are presented in Statements 1 through
5 of the 1986 Annual Financial Report. The following comments relate to those state-
ments.
Cash and Investments
Cash and Investments held by the City at December 31, 1985 totaled $2,605,143 as com-
pared to the 1986 balance of $1,415,996. The decrease in cash primarily represents 1985
bond proceeds expended in 1986. Additionally, the City increased the fund balance of
the General Fund (see later comments). Cash and investments are summarized as follows:
December 31, Increase
Description 1986 1985 (Decrease)
Treasurer's balance - checking $ (55,091) $ 5,792 $ (60,883)
Petty cash 150 150
Investments:
Certificate of deposits 706,932 1,800,000 (1,093,068)
Small Business Administration
(SBA) 71,577 75,252 (3,675)
FNMA Pool 398,114 507,353 (109,239)
NOW account 294,314 216,596 77,718
Totals $1,415,996 $2,605,143 $(1,189,147)
The City had interest earnings on investments of $146,689 in 1986 as compared to
1985 earnings of $53,501. The increase in interest earnings was caused by an increase
in the average cash available (to invest due to issuance of the 1985 Certificates of
Indebtedness and the 1985 G.O. Improvement Bonds sold in November, 1985 and increased
fund balance).
The City maintains an average negative balance in the City's checking account.
These negative balances are "book" balances only. These balances indicate that the City
is depositing cash which is not needed for current expenses into interest bearing
accounts. We recommend that the City continue this practice of minimal balances in the
City's checking account to increase interest earnings.
City of Lino Lakes, Minnesota
Management Report, Page 7
The City currently has a federally secured investment of the Small Business
Administration (SBA). This type of investment is acceptable for Minnesota cities.
There have been notices from the SBA that payments from the borrower have been late and
therefore payments to the City have been delayed. We recommend that the City monitor
compliance with payment terms.
We recommend the City consider adopting a policy on investing. An investment policy
should be designed to safeguard types of investments purchased, enhance procedures to
comply with State statutes and assure that competitive market interest rates are
earned. The policy should address City investing parameters in relation to 1) security,
2) liquidity, 3) yield, and 4) risk to market.
Due From Other Governmental Units
Included in Due From Other Governmental Units are various Federal and State Grants
Receivable that the City has earned as of December 31, 1986. The following schedule
details these amounts.
Description
December 31,
1986 1985
State:
Fines and forfeits $ 4,771 $ 4,699
Video game refund 30
Federal:
Community Development Block Grant 8,397
Federal Revenue Sharing 742 11,022
LAWCON 5,135 1,640
Local:
MWCC - Maintenance Agreement 3,068 5,108
Final cost allocation 5,011 4,095
Police contract 11,269
MWCC - SAC overpayment 421
Metro Council - Section 8 408
Total
$ 18,757 $ 47,059
City of Lino Lakes, Minnesota
Management Report, Page 8
The City currently receives approximately $14,000 annually in MSA maintenance
monies. The City also has available approximately $280,000 annually in MSA construc-
tion allotments. These construction allotments ordinarily can be used to finance
construction costs relating to MSA designated streets. Unused construction allotments
total approximately $811,000 at December 31, 1986. The City may be able to justify
and request up to 25% of such annual total allotments for maintenance purposes (i.e.,
25% of $280,000 or $70,000 per year). This could increase the total MSA receipts of
the City during periods in which the City does not have qualifying MSA construction
projects. We recommend that the City consider this option.
Taxes Receivable
Delinquent taxes receivable were as follows for 1982 through 1986:
1986 1985 1984 1983 1982
Delinquent balance - January 1 $100,004 $ 86,141 $ 84,603 $ 81,671 $ 44,254
Current levy 880,500 775,000 690,000 587,845 544,842
Total receivable 980,504 861,141 774,603 669,516 589,096
Receipts:
County:
Current 557,533 514,978 467,696 380,063 332,566
Delinquent 28,464 19,630 33,045 34,223 23,750
State 249,813 226,529 187,721 170,627 139,283
Total receipts 835,810 761,137 688,462 584,913 495,599
Unadjusted balance 144,694 100,004 86,141 84,603 93,497
Homestead credit loss 11,826
Delinquent balance $144,694 $100,004 $ 86,141 $ 84,603 $ 81,671
Total collections as a percent
of current levy 95% 98% 100% 99% 91%
Property taxes are a primary revenue source of the City. The reduction in property
tax collections should be reviewed. The County maintains detail of delinquent property
taxes by parcel. We recommend that the City request a delinquent listing of property
taxes to determine if such delinquencies are concentrated in certain areas of the City,
and more importantly, to determine if an adverse trend is developing.
City of Lino Lakes, Minnesota
Management Report, Page 9
In 1982 the State arbitrarily reduced homestead credits received by the City. No
replacement aid was provided. The State proposes cuts in homestead credits annually.
We recommend that the City continue efforts to monitor State financial legislation to
react to adverse proposals on a timely basis.
Special Assessments Receivable
Special assessments receivable consisted of the following:
December 31, Increase
1986 1985 (Decrease)
Delinquent $ 290,525 $ 271,588 $ 18,937
Deferred 1,899,132 491,159 1,407,973
City property 148,097 129,819 18,278
Total $2,337,754 $ 892,566 $1,445,188
Delinquent assessments consist of amounts which were spread for collection in 1986
and prior years which have not yet been received. For 1982 through 1986, special
assessment collections were as follows:
Delinquent balance - January 1
Add:
Current installment
Delinquent - previously not
spread for collection
Amount collectible
1986 1985 1984 1983 1982
$271,588 $182,722 $123,970 $ 31,780 $ 16,356
162,553 183,830 201,280 227,230 215,629
8,446
434,141 366,552 333,696 259,010 231.,985
Less:
Current collections 78,980 63,292 124,395 123,535 185,968
Delinquent collections 63,103 31,672 25,945 6,578 14,237
Total collections 142.083 94.964 150.340 130.113 200.205
Adjustments (1 533) -0- (634) (4,927) -0-
Delinquent balance - December 31
Total collections as a percent
of current levy
$290,525 $271,588 $182,722 $123,970 $ 31,780
87% 52% 75% 57% 93%
City of Lino Lakes, Minnesota
Management Report, Page 10
As the above schedule shows, special assessment collection rates have fluctuated
substantially over the past several years. The ability of the City to collect special
assessments is vital to the financing of the Special Assessment Debt Service Funds of
the City. The primary funding of debt payments is special assessments. Timely collec-
tion of special assessments are required to assure timely availability of cash to meet
the scheduled debt payments. If the City continues to experience high delinquency
rates, the funds which rely on assessments will be unable to meet scheduled bond maturi-
ties on a timely basis. We recommend that the City monitor the collection rate and pro-
vide supplemental financing if assessment collections are not adequate to meet bonded
debt payments.
The amount listed as "City property" totaled $148,097 at December 31, 1986.
The City acquired these properties in order to recover the assessments levied against
these properties. The City has received clearance to permit development of these lots
from various authorities (Army Corps of Engineers and State DNR). The City intends to
sell the properties and recover the related assessments. The City has determined that
the amounts may not be fully recoverable. As such, we recommend that the City levy the
portion of scheduled property taxes required to meet bonded debt payments.
The City collects special assessments through Anoka County. This agency arrangement
has advantages to the City primarily in saving administrative time and effort required
to bill and collect special assessments. A certain level of control, however, is lost
through the agency arrangement insofar as accounting records are located and maintained
at both the County and the City. Correlation of these records is required to assure
accurate tabulation of receivables and amounts received. In order to assure that the
City's best interests are guarded, the City should improve internal records with regard
to special assessments and compare such records periodically to County records.
City of Lino Lakes, Minnesota
Management Report, Page 11
The above procedures will allow the City greater assurance that all of its special
assessments are properly spread for collection. Additionally, the City will have the
ability to generate year end balances for annual financial reporting with greater ease
and accuracy. The increased level of control required is partially a function of
increased assessment activity. Special assessments receivable (City -wide) was less than
$100,000 in 1979. Assessments receivable were nearly $2.4 million at December 31, 1986.
Fixed Assets
The City does not currently maintain accounting records of its general fixed assets.
This situation is not uncommon for Metropolitan suburban communities. The benefits of a
fixed asset system are improved financial reporting, better availability of insurance
information, availability of data base for determining capital replacement needs and an
overall improved safeguard over City assets. The implementation of such a system may
not be a priority of the City at this time. We recommend, however, that the City con-
sider the benefits of implementing a general fixed asset system at some future date.
City of Lino Lakes, Minnesota
Management Report, Page 12
Fund Equity
Fund
Fund Position (Deficit)
December 31, Increase
1986 1985 (Decrease)
Fund Balance:
General Fund $ 541,641 $ 428,299 $ 113,342
Special Revenue Fund:
Revenue Sharing 2,377 12,230 (9,853)
Debt Service:
1985 Certificates of Indebtedness (274) 292 (566)
Capital Projects:
Parks and Playgrounds 131,907 122,341 9,566
Capital Improvements 43,417 117,797 (74,380)
Community Development Block Grant 1,713 (133) 1,846
LAWCON Grant (47,244) (43,302) (3,942)
Special Assessment:
Improvement Bonds of 1977 16,912 15,757 1,155
Improvement Bonds of 1980 43,089 44,169 (1,080)
Improvement Bonds of 1981 18,096 16,662 1,434
Improvement Bonds of 1982 533,869 223,457 310,412
Improvement Bonds of 1983 15,636 13,382 2,254
Improvement Bonds of 1984 (1,285) (1,478) 193
Improvement Bonds of 1985 (320,748) (1,641,551) 1,320,803
Improvement Bonds of 1986 (276,553) (276,553)
Interim Construction Fund (258,457) (16,108) (242,349)
Lakes Addition #7 (17,288) (22,675) 5,387
Baldwin Lake Mobile Home Court 13,013 10,491 2,522
Tomahawk Trail 304 305 (1)
Reiling Road (2,779) (2,539) (240)
Rice Lake Estates 513,292 1,565,507 (1,052,215)
North Road (6,090) (6,090)
Main Street (330) (330)
West Shadow Lake Drive (10,819) (10,819)
Sunset Road 145,013 145,013
Deer Pass Trail (377) (377)
Totals 1,078,035 842,903 235,132
Retained Earnings:
Sewer and Water Fund
20,874 15,616 5,258
Grand Totals $1,098,909 $ 858,519 $ 240,390
The following section of this report relates to the various changes in the fund
positions.
City of Lino Lakes, Minnesota
Management Report, Page 13
General Fund
The financial statements for the General Fund are presented in Statement 6 and 7 of
the 1986 Annual Financial Report. The fund balance of the General Fund was $541,641 at
December 31, 1986 representing a $113,342 increase in fund balance during 1986 as result
of the following:
Budgeted increase in fund balance $ 51,000
Actual revenues over (under) budgeted revenues:
Tax collections $ (13,316)
Licenses and permits 42,879
Intergovernmental revenue 3,410
Charges for services (4,751)
Court fines 32,369
Miscellaneous 10,940
Net revenue over budget
Actual expenditures under (over)
budgeted expenditures:
General government:
Purchase of fire hall
Other
Public safety
Highways and streets
Parks
Other
(105,000)
(28,651)
41,470
17,204
(3,909)
(10,149)
Net expenditures under budget
Actual net transfers in over budget
Contract for deed - land purchase over budget
Total improvement
71,531
(89,035)
(154)
80,000
$ 113,342
Statement 7 of the 1986 Annual Financial Report presents additional detail relating
to the above budget variances.
The overall fund balance of the General Fund has been as follows for the past
several years:
Fund Balance (Deficit)
Increase
Year Ended (Decrease) in
December 31, Designated Undesignated Undesignated
1978 $ 11,464 $ 51,249
1979 14,655 50,652 $ (597)
1980 18,766 (19,730) (70,382)
1981 19,876 30,109 49,839
1982 46,466 13,355 (16,754)
1983 51,084 80,032 66,677
1984 116,770 126,153 46,121
1985 77,624 350,675 224,522
1986 83,714 457,927 107,252
1
City of Lino Lakes, Minnesota
Management Report, Page 14
The City increased the overall fund balance by $113,342 in 1986. A portion of the
balance is committed to specific uses as follows:
• LAWCON (special levy) which must be used for matching
expenditures or be substantiated through the
allocation of "in- kind" costs .
• Prepaid insurance
Total
$ 30,000
53,714
$ 83,714
A graphic illustration of fund balance compared to expenditures and transfers out is
as follows:
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
On $1,000)
1979 1980
1981
1982
1983
1984
1985
1986
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
0 Expenditures and Transfers Fund Balance
The amount of General Fund reserve required to meet emergency and /or unanticipated
expenditures is not readily quantifiable. Rather, the level of this requirement must be
established by the City based on the history of the City and the philosophy of
"adequate" reserve coverage.
The reserve requirement to deal with unforeseen intergovernmental revenue reductions
is also difficult to quantify. State and Federal legislation dealing with shared aids
is somewhat unpredictable. The City must strive to remain current on the effects of
changing legislation and budget such aids accordingly. A reserve balance in the City's
General Fund will mitigate the adverse effects of aid reductions which are received
after expenditure budget commitments are made.
City of Lino Lakes, Minnesota
Management Report, Page 15
The City's minimum cash flow reserve requirement is measurable. For the City of
Lino Lakes, the minimum required surplus is $590,250 computed as follows:
1987 Budgeted Levy (Includes Homestead Credit)
1987 Anticipated Local Government Aid
$ 948,000
232,500
Total $1,180,500
Minimum Required Cash -Flow Reserve (One -Half of Total) $ 590,250
The City improved the financial position and undesignated reserve balance of the
General Fund substantially in 1986. This increase (plus incremental increases over the
past several years) will allow the City to better manage the impending State aid reduc-
tions of 1987.
The level of fund balance of the City's General Fund is one indicator of the finan-
cial strength or independence of a city. This often becomes critical during periods of
high inflation; decreasing State aids; and, poor economic growth. With adequate reser-
ves, these external factors are more manageable by the City. We commend the City for
the improvements made in recent years to the General Fund reserve balance. These impro-
vements indicate a responsible approach to City government which will assure the con-
tinued ability of the City to deliver basic required services on a timely basis.
Special Revenue Funds
The financial statements of the Special Revenue Funds are presented in Statements 8
and 9 of the 1986 Annual Financial Report. A special revenue fund is a classification
of funds to account for revenues segregated by City ordinance or Federal or State
Statutes for specific purposes. The City maintains the Federal Revenue Sharing Fund as
the only Special Revenue Fund of the City. The fund balance of the Federal Revenue
Sharing Fund of $2,377 at December 31, 1986 consists of the fourth quarter allotment
receivable ($742) and accumulated interest earned over the past year.
Federal legislation has eliminated the Revenue Sharing Program. We recommend that
the City expend the remaining balance of this fund in 1987 to effectively close the fund.
City of Lino Lakes, Minnesota
Management Report, Page 16
Debt Service Funds
Debt Service Funds are governmental type funds used to account for accumulation of
resources for (and the payment of) principal and interest on general debt. The City had
one general debt bond issue outstanding during 1986 (the 1985 Certificates of
Indebtedness).
The following schedule reflects the projected final fund balance of the 1985
Certificates of Indebtedness Debt Service fund. This projection is based on future
scheduled tax levies and future bond principle and interest payments. It does not
include future investment interest earnings which would increase the projected reserve
balance.
Fund Balance 12/31/86
Future tax levies
Future bond principle and interest
$ (274)
81,000
79,837
Projected balance $ 889
Final maturity 12/1/88
The above schedule indicates that the 1985 Certificates are adequately financed.
However, the interest payments are due June 1st and December 1st of each year.
Principle payments are due December 1st of each year. The City does not receive its tax
remittances until mid -July and mid - December. Therefore, this fund will experience a
temporary cash overdraft in June and December of each year until final bond maturity.
We recommend that for future issues, the City prepare cash flow schedules to assure that
adequate cash will be on hand in the fund prior to scheduled debt payments.
City of Lino Lakes, Minnesota
Management Report, Page 17
Capital Project Funds
The financial statements for the City's Capital Project Funds are presented in
Statements 12 and 13 of the 1986 Annual Financial Report. A Capital Project Fund is a
classification of funds to account for receipts and disbursement of monies used for
acquisition and construction of capital facilities other than those financed by special
assessment funds. The fund balances of the Capital Project Funds at December 31, 1986
and 1985 were:
Fund
Parks and Playground
Capital Improvements
Community Development Block Grant
LAWCON Grant
Totals
December 31, Increase
1986 1985 (Decrease)
$ 131,907 $ 122,341 $ 9,566
43,417 117,797 (74,380)
1,713 (133) 1,846
(47,244) (43,302) (3,942)
$ 129,793 $ 196,703 $(66,910)
Parks and Playground
This fund was established to account for dedicated park fees. The City uses the
Parks and Playground Fund to collect ordinance restricted fees and donations from
various groups. The fund balance of $131,907 at December 31, 1986 is available for
expenditures by the City to fund capital outlay and maintenance of dedicated park lands.
The City normally collects park dedication fees upon subdivision. The City has made
exceptions for several developers to allow for payment upon development (as opposed to
subdivision). The amount of these park dedication fees receivable was $5,060 at
December 31, 1985 and 1986.
City of Lino Lakes, Minnesota
Management Report, Page 18
Capital Improvements Fund
The 1985 Certificates were issued to finance the acquisition of equipment for
various departments of the City. The following schedule reflects the budget and actual
expenditures for this certificate:
Description
Police Cars
Dump Truck with Plow
Mini Dump Truck with Plow
Equipment Trailer
Street Sweeper
Crack Filling Machine
Public Works Vehicle
Totals
1985 1986
Budget Actual Actual
$ 25,000 $ 24,844
60,000 39,955
17,000 17,516
3,000
3,000 $ 3,000
6,000
4,725 4,725
$ 118,725 $ 7,725 $ 82,315
Variance
$ 156
20,045
(516)
3,000
6,000
$ 28,685
The certificates were sold for proceeds of $107,500. The above schedule reflects
anticipated purchases of $118,725. The excess purchases (over the $107,500 1985
Certificates of Indebtedness) is to be financed by the balance remaining in this fund
from prior years as well as future interest earnings. The remaining equipment is sche-
duled to be purchased in 1987.
The following schedule summarizes the activity of this fund through December 31,
1986.
Proceeds for issuance of 1981 certificates
Proceeds for issuance of 1985 certificates
Interest earnings:
1981
1982
1983
1984
1985
1986
Property taxes
Transfer from Debt Service Fund
Total revenue and other sources
Expenditures:
1981
1982
1983
1984
1985
1986
$ 111,400
107,500
1,288
9,901
1,758
1,300
1,192
5,218
10,405
2,390
$ 2,707
55,136
50,506
10,546
7,725
82,315
$ 252,352
Total expenditures 208,935
Fund balance - December 31, 1986 $ 43,417
City of Lino Lakes, Minnesota
Management Report, Page 19
After the scheduled purchases of equipment are made in 1987, the remaining fund
balance should be closed to the 1985 Certificates of Indebtedness Debt Service Fund (or
be expended on qualifying equipment purchases).
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, were 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 determined 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 in reimbursement of City expenditures.
The CDBG allotments for 1982 to 1985 were appropriated for the Alexander House
and the Senior Citizen Facility. Anoka County did not allocate additional CDBG amounts
for the City in 1986. This is consistent with the overall allotment plan. The City had
consumed all of Anoka County's CDBG allotment as follows:
Budget
Year
Original
Allotment
1982 $ 84,889
1983 39,179
1 983
(Supplemental) 12,434
1984 25,000
1985 66,098
1986 -0-
Totals
$ 227,600
Allocated to
Alexander
House
$ 10,000
3,000
$ 13,000
County
Reimbursements
$ 74,889
49,179
12,434
57,525
6,199
14,374
$ 214,600
County
Approved
Transfers
$ 10,000
35,525
(45,525)
$ -0-
The remaining fund balance of $1,713 will be used in 1987 to fund Senior Council
start up expenditures. The City anticipates $25,148 of CDBG allotment for the year
beginning June 1, 1987 for: 1) Administration - $1,250; 2) Senior Coordinator - $3,900;
and, 3) Assessment Subsidy - 2nd Avenue - $19,998.
City of Lino Lakes, Minnesota
Management Report, Page 20
LAWCON Grant
The LAWCON Grant Fund was established to account for the grant awarded to the City
for the development of Country Lakes Park. Total grant awarded was $115,713. This
grant agreement requires the grantee to properly document all expenditures related to
the grant agreement. Documentation of these expenditures is necessary in order for the
grantee to earn the grant monies approved.
The fund deficit of this fund is a result of the following activity since inception:
Revenue:
State Grant (28% of expenditures)
Federal Grant (30% of expenditures)
Interest on investments
Total revenue
$ 34,875
37,367
5,069
Expenditures:
Contractor 92,985
Engineering 13,642
Other 17,928
Total expenditures
$ 77,311
124,555
Fund balance (deficit) - December 31, 1986 $(47,244)
The above fund deficit ($47,244) is the City share of expenditures to date. The
total anticipated project funding is as follows:
State $ 56,367
Federal 59,346
City 82,107
Total estimated
project $ 197,820
City of Lino Lakes, Minnesota
Management Report, Page 21
The City had received a time extension until December 31, 1986 to complete the pro-
ject and has met this deadline.
The City has levied property taxes to fund a portion of its share ($30,000 levied
for collection in 1982). These taxes are a part of the designated fund balance of the
City's General Fund. A portion of this designation may be expended directly from the
General Fund through "in kind" costs (i.e., administrative and other efforts which meet
certain grant criteria). As the City incurs expenditures, we recommend that the City
fund the City share from the General Fund or other designated City sources (i.e., Parks
and Playground Fund).
Special Assessment Funds
The financial statements of the Special Assessment Funds are presented in Statements
14 and 15 of the 1986 Annual Financial Report. A Special Assessment Fund is organized
to account for both the construction and financing of assessable improvement projects.
The accounting principles employed by the Special Assessment Fund - Debt Service
Accounts are such that future interest on bonds payable is not reflected in the Balance
Sheet until the year it becomes payable and future interest on special assessments is
not reflected until the year it becomes receivable. Therefore, the financial position
of these funds do not reflect future interest receivable or payable. Scheduled future
tax levies are not reflected as income until the year of collection. In order to pro-
ject the final fund surplus or shortage these three items must be considered.
City of Lino Lakes, Minnesota
Management Report, Page 22
Presented herewith, are projected financial positions of the various Special
Assessment Debt Funds of the City (excluding the Temporary Improvement Bonds of 1985)
based on scheduled future tax levies, future interest payable on bonds, and estimated
future interest receivable on deferred assessments. Future interest on investments are
not considered due to the uncertainties involved.
Fund Scheduled Future Interest Projected Year of
Position Future Add: Deduct: Fund Final
Debt Service Fund 12/31/86 Tax Levies Assessments Bonds Position Maturity
Improvement Bonds of 1977 $ 16,912 $ 285 $ 316 $ 16,881 1987
improvement Bonds of 1981 18,096 8,336 8,175 18,257 1991
Improvement Bonds of 1982 533,869 49,728 55,475 528,122(1) 1988
Improvement Bonds of 1983 15,636 34,691 25,650 24,677 1993
Improvement Bonds of 1984 (1,285) $ 284 9,756 10,919 (2,164) 1994
Improvement Bonds of 1986 (276,553) 105,314 74,012 96,580 (193,807)(1) 1993
Totals $ 306,675 $ 105,598 $ 176,808 $ 197,115
Total projected fund position
Less: City property assessments included in projections
Adjusted projected fund position
Statutory reserve (5% of unmatured bond requirements)
Excess projected fund position
(1) Funds will be combined after call provision and retirement of all 1982
bonds. Projected balance (net) is $334,315 at December 31, 1986.
391,966
140,329
251,637
70, 100
$ 181, 537
The overall actual and projected fund positions of the Special Assessment Funds
indicate that these bond funds are adequately financed at December 31, 1986. The reader
should be cautioned that the above projected position is based upon fund balances and
that these funds may experience cash overdraft balances due to timing of assessment
collections (i.e., delinquencies).
Improvement Bonds of 1977
The projected balance of $16,900 represents a $1,200 increase during 1986. This
increase was primarily the result of interest on investments. We recommend that the
City monitor the projected balance and develop a plan for the intended use of the
balance available upon final payment in 1987.
City of Lino Lakes, Minnesota
Management Report, Page 23
Improvement Bonds of 1980
The 1980 Special Assessment Bonds fully matured in 1986. The remaining balance
(after final bond payment) can be transferred to another City fund at the discretion of
the City Council. We recommend that the City plan for the use of this remaining
balance. One option is to use this to establish a closed bond fund. This fund may be
used to finance deficits of other Special Assessment Debt Service Funds or may be used
to finance minor projects for which bonding is not cost effective. The monies in this
type of fund are not restricted to transfer within the Special Assessment Fund type.
The Council may elect to use the residual monies for any governmental purpose. We
recommend that the City establish a Closed Bond Fund in 1987 and transfer the residual
balances of the 1980 Bond Fund.
During 1984, this fund experienced a collection rate on current assessments of 17%
for the major assessment roll. This amounted to a $42,000 increase in delinquent
assessments related to one major property owner. In 1985 this collection rate improved
to 53 %. However, delinquent assessment now total $90,600. The 1986 collection rate was
35 %. However, during 1986, the City collected $22,000 of delinquent assessments. The
fund has a cash deficit of nearly $40,000 at December 31, 1986.
Improvement Bonds of 1981
The Improvement Bonds of 1981 have a positive projected balance of $18,250 at
December 31, 1987. We recommend that the City monitor the results of this fund
annually.
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City of Lino Lakes, Minnesota
Management Report, Page 24
Improvement Bonds of 1982
The Improvement Bonds of 1982 were refinanced by the Improvement Bonds of 1986.
Bonds maturing in the years 1989 through 1991, representing $375,000, were called on
February 1, 1987. Upon final bond maturity in 1988, the remaining assets of this fund
should be transferred to the Improvement Bonds of 1986.
The Improvement Bonds of 1982 are adequately financed based on assets provided for
payment of the bonds. The fund, however, is carrying assessments on City property
totaling $129,819 for which payment terms have not been established (see previous
comments). The City has advertised for bids on the sale of the City property in 1986
(see earlier commentary). There is also $177,800 of delinquent assessments receivable.
The fund experienced a 1985 collection rate on current assessments receivable of
13% causing an increase in delinquent assessments of $86,000. The 1986 collection rate
on current assessments receivable was 35 %. The fund does have future scheduled tax
levies of $190,535. The City, however, cancelled the collectible 1985, 1986 and 1987
levies for this fund.
The City should prepare projections on this fund to insure that adequate cash assets
will be available on a timely basis to meet bond principal and interest payments as they
become due.
Improvement Bonds of 1983
The Improvement Bonds of 1983 have a positive projected balance of $24,677 at
December 31, 1986. We recommend that the City monitor the results of this fund
annually.
City of Lino Lakes, Minnesota
Management Report, Page 25
Improvement Bonds of 1984
The Improvement Bonds of 1984 has a projected deficit of $2,164 at December 31,
1986. This projected deficit is the result of an under - assessment of the project as
follows:
Actual costs - December 31, 1986 $ 35,666
Capitalized interest -0-
Total 35,666
Amount assessed 30,370
Difference $ 5,296
We recommend that the City review the financing of this fund and provide additional
financing if required.
Temporary Improvement Bonds of 1985
The Temporary Improvement Bonds of 1985 were issued to finance Weber's Addition
(Tomahawk Trail) and the Rice Lake Estates Addition. Final payment on these bonds is
due November, 1988 at which time definitive bonds will be required. Weber Addition was
completed and assessed in 1985. Bids were requested for Rice Lake Estates in January,
1986. This project was assessed in 1986. We recommend that the City consider securing
permanent financing for this temporary fund in 1987 if rates are favorable.
Improvement Bonds of 1986
The Improvement Bonds of 1986 were issued to refinance the Improvement Bonds of 1982
and to finance the Sunset Road improvements. Upon final maturity of the 1982
Improvement Bonds, the remaining assets should be transferred to this fund.
Special Assessment Fund Reporting
National reporting standards have been amended regarding the financial statement
presentation for special assessment funds. The City will be required to amend reporting
procedures to comply with the new reporting standards.
City of Lino Lakes, Minnesota
Management Report, Page 26
The Governmental Accounting Standards Board (GASB) has issued Statement No. 6
(Accounting and Financial Reporting for Special Assessments). The most significant
changes which effect the City's Annual Financial Report are as follows:
1. Special Assessment Funds will no longer be presented in the combined and com-
bining financial statements of the City.
2. The City will now be required to split the balance sheet and operating statement
related to special assessment activities between the following funds and account
groups:
• Debt Service Fund • Enterprise Fund
• Capital Project Fund • General Long -Term Debt Group of Accounts
3. Balance sheets contained in the combined and combining financial statements will
no longer present a matching of cash, special assessments receivable and other
assets compared to outstanding bond principal for the various special assessment
bonds of the City.
4. Projects which are funded in part by water and sewer fund reserves will require
a splitting of debt between the General Long -Term Debt Group of Accounts and the
Enterprise Fund. The construction costs will require apportionment on two
separate methods of accounting (accrual versus modified accrual). This reporting
requirement may require a separate internal fund structure to comply with the
terms of bond resolutions (legal requirement). The City would then be required
to apportion internal fund reporting to an acceptable third party report format.
The accounting principles relating to special assessments have been under scrutiny
for a number of years. There have been a variety of proposals to amend the "generally
accepted accounting principles" related to special assessment funds. Until the issuance
of GASB #6, there had been a lack of concurrence of correct reporting procedures and
therefore financial statements were often not comparable between various cities.
Although we concur with the establishment of one consistent "generally accepted
accounting principle" for special assessments, there will be a different set of finan-
cial data published in the financial statements to judge and manage the special
assessment funds of the City. We will be available to assist the City in this area.
City of Lino Lakes, Minnesota
Management Report, Page 27
Construction Funds
Lakes Addition #7
Lakes Addition #7 has had the following transactions from inception:
Miscellaneous Revenue
Developer reimbursement
1982 and 1983 and
Prior 1984 1985 1986 Total
$ 183 $ -0- $ -0- $ 102
18,285 $ 18,570
Preliminary Construction Costs $ 22,767 -0- $ 91 $ 13,000 35,858
Fund balance (deficit) - December 31, 1986 $(17,288)
The above deficit primarily relates to the loss of a lawsuit regarding development.
We recommend that the City designate a financial source and eliminate this fund in 1987.
Baldwin Lake Mobile Home Court
This project was financed by the $100,000 Improvement Bonds of 1983. The project
consisted of installations of sewer service lines to the mobile home court. The project
was completed and assessed in 1983. The fund is carrying a liability to MWCC for sewer
availability charges of $24,400. We recommend that the City remit this money to MWCC in
1987.
This project is complete at December 31, 1986. We recommend that this fund be
closed in 1987 to the Improvement Bonds of 1983 Debt Service Fund. Council authoriza-
tion is required to effect this closing.
Tomahawk Trail/Weber's Addition
The City completed this sanitary sewer project in 1985. The project was assessed in
1985.
This project was bonded for in 1985 with the Rice Lake Estates Project. We recom-
mend that this fund be closed in 1987 to the Improvement Bonds of 1985 Debt Service
Fund. Council authorization is required to effect this closing.
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City of Lino Lakes, Minnesota
Management Report, Page 28
Reiling Road
This project was financed by the Improvement Bonds of 1984. This project was
substantially complete in 1985. Final payment to the contractor has been withheld
pending settlement of a dispute with adjacent property owners. The fund deficit at
December 31, 1986 was $2,779. We recommend that the City eliminate this deficit in 1987
through a City Council designated transfer.
Interim Construction
This fund was established in 1985 to account for the preliminary construction costs
prior to permanent bonding or other financing determination. We concur with the City in
establishing this fund.
1986 activity of this fund was for preliminary costs of the 4th Avenue bridge pro-
ject and the 80th Avenue project. Costs incurred to date are as follows:
4th•Avenue 80th Avenue Total
Engineering $ 62,939 $ 5,161 $ 68,100
Contracting 133,043 133,043
Other 57,296 18 57,314
Totals $253,278 $ 5,179 $ 258,457
The 4th Avenue project will be funded primarily from MSA allotments. A portion of
the project will also be assessed.
Rice Lakes Estates Addition
The City began this project in 1985. The project is scheduled for completion in
1987. We recommend that this fund be closed to the Temporary Improvement Bond Fund
after final completion of construction.
North Road
This fund was established in 1986 to account for North Road Improvements. This pro-
ject will be financed by a 1987 bond issue.
City of Lino Lakes, Minnesota
Management Report, Page 29
Main Street
This fund was established in 1986 to account for the Main Street Improvements. This
project will be financed by a 1987 bond issue.
West Shadow Lake Drive
This fund was established in 1986 to account for the West Shadow Lake Drive. This
project has not been approved and may not be constructed in 1987.
Sunset Road
This fund was established in 1986 to account for the Sunset Road Improvements. This
project was financed by the Improvement Bonds of 1986. This project was assessed in
1986. This project is scheduled for completion in 1987.
Deer Trail Pass
This fund was established in 1986 to account for the Deer Trail Pass Improvements.
This project will be financed by a 1987 bond issue.
Administrative Construction Charges
The City incurs expenditures in the General Fund through use of administrative time
and effort in the completion of construction projects. It is appropriate for the City
to charge an interfund administrative fee for these services during the construction
phase of the project. A common basis for the fee is a percent of the project or of the
contract (either a flat percent or a sliding percent based on the size of the project).
During 1984, the City established a policy regarding administrative charges
(Resolution #84 -4). The policy includes a "step down" administrative charge based on
the size of the project. We concur with this approach and, in our opinion, the percen-
tages used are reasonable and comparable to those used by other suburban metropolitan
cities.
City of Lino Lakes, Minnesota
Management Report, Page 30
The policy (as implemented) requires one time transfers of administrative charges
from the special assessment construction funds. However, the policy is unclear as to
when the transfer for administrative charges should be made. We recommend the City
clarify their position with respect to this policy (i.e., full transfer at completeness
of project or start of project or annually based on percent of completion).
Enterprise Fund
The Enterprise Fund of the City of Lino Lakes financial statements are presented in
the 1986 Annual Financial Report in Statements 16 through 18.
Presented below are condensed comparative operating statements. Contributed depre-
ciation has not been included in these presentations.
For The Year Ended December 31,
1986 1985
Amount Percent Amount Percent
Operating Income:
Water billings $ 11,608 19.42% $ 7,640 14.94%
Sewer billings 41,655 69.68 39,084 76.41
Other 4,676 7.82 4,428 8.65
Total operating income 57,939 96.92 51,152 100.00
Operating Expenses:
Personal services 16,204 27.10 12,438 24.32
MWCC 28,272 47.29 25,954 50.74
Repairs and maintenance 5,313 8.89 3,061 5.98
Depreciation 984 1.65 984 1.92
Other 9,008 15.07 8,689 16.99
Total operating expenses 59,781 100.00 51,126 99.95
Income (Loss) From Operations (1,842) (3.08 %) 26 .05%
Other Income /(Expenses):
MWCC maintenance agreement
Net Income /(Loss)
7,100
$ 5,258
8,305
$ 8,331
The operating results of the Water and Sewer Utility Fund increased by $5,000 from
1985. The increased revenue was primarily the result of increased connections to sewer
and water. The City is currently reviewing water and sewer rates and is considering
increasing rates in 1987.
City of Lino Lakes, Minnesota
Management Report, Page 31
The Metropolitan Waste Control Commission (MWCC) bills the City annually on an esti-
mated basis. These estimated billings are adjusted at a later date and the City is then
billed the additional amount or given a refund. These estimated billings vary from year
to year and may cause material variances in annual profits or losses of the utility
fund. The MWCC billings for the period 1977 to 1986 were as follows:
Billings from MWCC
Estimated Final
Percent Percent
Year Amount Change Amount Change
1977 $ 3,046 $ 1,573
1978 3,560 16.8% 3,662 132.8%
1979 8,312 133.5 6,171 68.5
1980 6,858 (17.5) 7,123 15.4
1981 11,357 65.6 10,213 43.4
1982 15,504 36.5 14,592 42.9
1983 19,027 22.7 23,866 63.6
1984 26,107 37.2 22,011 (8.4)
1985 30,050 15.1 25,039 13.8
1986 33,283 10.8 Not available
1987 37,845 13.7 Not available
A graph of the above data is as follows:
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
MWCC Billings
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Estimated Billings Actual Billings
City of Lino Lakes, Minnesota
Management Report, Page 32
There are two basic factors which contribute to increased billings from the MWCC.
The first is increased use of the system. The estimated increased usage for 1987 over
1986 for the City of Lino Lakes is 10.5 %. The second factor which increases the billings
from MWCC is their increased cost to process gallonage. Their cost to process (per
million gallons) increased from an estimated $876 to an estimated $901. This represents
an increase of 3 %. The combination of these factors increased the City's estimated cost
in 1987 by 14 %. As the system gains users, the increased usage part of the overall
increase should be offset by the billings to new users. The per unit portion of the
increase, however, must be borne in full by existing users or be subsidized by overall
City operations.
The City has no control over the billings from the MWCC for the sewer treatment
costs. This operating expense comprises 68% of the 1986 customer billings for sewer
service charges. The City must set rates at levels adequate to pay for the pass through
costs from MWCC plus other City expenses. In view of this arrangement with MWCC, the
City's ability to exercise control over its sewer operations is limited. The City can
be construed to be acting as an agent for the MWCC with regard to sanitary sewer opera-
tions.
The MWCC has approved a change in the district structure and will be converting
rates and other operating procedures over the next several years. We recommend that the
City monitor the effects of these changes and consider such changes on the City's sewer
rates.
City of Lino Lakes, Minnesota
Management Report, Page 33
Adequate Retained Earnings Balances
Adequate retained earnings balances is an area which should be reviewed and defined
by City policy for the Water and Sewer Fund. Reserve balances are required for the
following:
1. Financing of accounts receivable and inventories. The City provides sewer ser-
vice and bills customers for such service. Revenue is recognized under the
accrual method of accounting as the service is provided (i.e., billed revenue is
included in the retained earnings balances). Billings however, may be collected
up to four months following the actual service. The City bills residential
customers quarterly and therefore the service provided in December may not be
collected until the end of March (i.e., sewer service for December, January and
February is billed at the start of March and collected later in the month). In
addition to the normal collection process, there are delinquencies which further
delay the collection of billings. The Utility Fund had $76,000 of accounts
receivable at December 31, 1986. Adequate retained earnings balances are
required to avoid cash overdrafts caused by the timing difference between ser-
vices provided and collections.
2. Capital asset replacement. The City has three primary classifications of capi-
tal purchases for the Water and Sewer Fund as follows:
• Machinery and equipment are purchased with revenues generated by the
Water and Sewer Fund.
• Water and sewer core systems are purchased through bonded debt which is
funded by a combination of property taxes and net revenues of the Water
and Sewer Fund.
• Water and sewer lateral improvements are contributed to the Water and
Sewer Fund through the special assessment process (i.e., paid for
directly by benefiting property owners).
The replacement of assets purchased from Sewer and Water Fund revenues must
be funded from sewer and water revenues. The City should maintain adequate
reserves to fund equipment and core system replacement. Major system purchases
are financed through revenue bonds and the resulting debt payments are spread
over a fifteen year (or greater) period. Such systems will be paid for through
future property taxes, increases in utility rates, and /or other City Council
designated sources. Routine equipment replacement is funded annually.
The City has three options with regard to replacing contributed systems as
follows:
• Pay for all such replacements from net utility revenues and /or tax levies.
• Pay for all such replacements through the special assessment process.
• Pay for such improvements through a combination of the above two methods.
City of Lino Lakes, Minnesota
Management Report, Page 34
Payment for replacing contributed systems entirely through utility revenues may
be financially burdensome for the Water and Sewer Fund and the users of such
systems. Conversely, full assessment of replacement systems may not be prac-
tical and may have statutory challenges (i.e., increase in value of property may
not correlate to the assessment amount).
An alternative method of financing the replacement of contributed systems is to
assess a portion to the benefited property owners based on an established stan-
dard life for the system. A system of assessing replacement systems at a pro-
portionate rate compared to useful life may be the most practical method. If a
system has an established useful life of 50 years and requires replacement after
30 years, the property owners would be assessed 60% of the cost of the replace-
ment system. Any such policy must be scrutinized by legal counsel to improve
the chance of prevailing in a contested assessment.
The level of reserve balance to fund asset replacement is dependent upon the
City's policy of funding the replacement of the various types of assets of the
City. Asset replacements will not be entirely financed from reserve balances of
the fund. Adequate reserves, however, allow the City options in dealing with
annual outlays related to such asset replacements.
3. Emergency and /or unanticipated expenses. The nature of a City's utility systems
is such that emergency expenditures are incurred frequently (i.e., major unan-
ticipated repairs). Additionally, major expense categories can fluctuate signi-
ficantly from year to year (i.e., MWCC, insurance, etc.). An adequate reserve
structure allows the City to react to these fluctuations without severely
disrupting the financial position of the fund.
In summary user rates must be sufficient to cover operating expenses, plus meet the
additional financial commitments of the City's Sewer and Water Enterprise Fund. These
additional financial commitments are as follows:
1. Capital outlay and /or depreciation for the non - system fixed assets (i.e., machi-
nery and equipment).
2. Future system improvements to be financed directly from user rates .(if any).
3. Debt payments (principal and interest) for a portion of the City's Sewer and
Water Revenue Bond Issues which are used to finance portions of the City's water
and sanitary sewer systems (i.e., water towers; wells; pumphouses; sanitary
sewer interceptors and lift stations; and water and sewer overpass).
4. Reserve balances for the Sewer and Water Enterprise Fund at sufficient levels to
meet current and future City policy.
Definition of an "adequate" balance can only be determined through a more thorough
study and by an understanding of the City Council's preference in dealing with the
various areas discussed above.
City of Lino Lakes, Minnesota
Management Report, Page 35
Agency Funds
The City maintained two Agency Funds in 1986 as follows:
• Contractor's Deposits
• Investment Fund
An Agency Fund is designed to account for transactions for other individuals, pri-
vate organizations and /or other funds.
The Contractor's Deposits Fund is used to account for "pass through" types of expen-
ditures 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 detail records of
amounts due from developers and assure that adequate deposits are received prior to
incurring expenses on a developer's behalf.
Franchise Agreement - Gas Utility
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. A summary of net income from 1978 through 1985 is as follows:
Net Income
Circle Pines Lino Lakes Total
Percent Percent Percent
Year Amount of Total Amount of Total Amount of Total
1978 $ 23,736 53.5% $ 20,602 46.5% $ 44,338 100.0%
1979 39,104 75.6 12,630 24.4 51,734 100.0
1980 22,563 86.2 3,605 13.8 26,168 100.0
1981 6,215 41.7 8,676 58.3 14,891 100.0
1982 70,955 78.4 19,587 21.6 90,542 100.0
1983 61,151 73.9 21,642 26.1 82,793 100.0
1984 40,821 71.8 16,043 28.2 56,864 100.0
1985 89,031 78.4 24,473 21.6 113,504 100.0
Eight Year
Totals $ 44,197 $ 15,907 $ 60,104 100.0%
City of Lino Lakes, Minnesota
Management Report, Page 36
The City of Lino Lakes has rights to receive payment of net income after the accumu-
lated retained earnings deficit is eliminated. The retained earnings for the gas utili-
ties have been as follows:
Retained Earnings (Deficit)
City of City of
Circle Pines Lino Lakes
December 31, Amount Amount Total
1978 $ 85,581 $(108,627) $(23,046)
1979 124,685 (95,997) 28,688
1980 147,248 (92,392) 54,856
1981 153,463 (83,716) 69,747
1982 224,418 (64,129) 160,289
1983 285,569 (42,487) 243,082
1984 326,390 (26,444) 299,946
1985 415,421 (1,971) 413,450
The preceding two schedules indicate that the Circle Pines gas utility operation has
been more profitable than the Lino Lakes operation. Additionally, the Circle Pines gas
utility has a positive retained earnings balance in excess of $415,000 while the Lino
Lakes retained earnings account is in a deficit position.
The City has taken the following actions regarding the gas utility operations:
• Successfully worked to gain special State legislation to allow a greater number
of members on the Joint Gas Utility Commission.
• Reviewed optional criteria for representation on the Commission to allow for a
fair and equitable method of appointing members from each City.
• Analyzed accounting methods of allocating expenses between each City's gas
operation.
• Negotiated a new franchise agreement.
The new franchise agreement will provide 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 interrup-
table sales which is based on 3 %;
City of Lino Lakes, Minnesota
Management Report, Page 37
3. Cancellable 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 calcula-
tions.
5. Revenue begins to be earned starting on January 1, 1987. Revenue will be
received four and one -half months after the year end (i.e., first receipt is
scheduled for 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. Financial uncertainties facing metropolitan cities require diver-
sity of revenue sources to assure adequate funding of operations without severe property
tax increases.
We recommend that the City establish review procedures to project revenue earnings
and to compare to actual results.
Internal Accounting Controls
As part of our examination, we made a study and evaluation of the system of
internal accounting control of the City of Lino Lakes to the extent we considered
necessary to evaluate the system, as required by generally accepted auditing
standards. The purpose of our study and evaluation was to determine the nature,
timing and extent of the auditing procedures necessary for the expression of an
opinion on the City's financial statements. Our study was more limited than
would be necessary to express an opinion on the system of internal accounting
control taken as a whole or on any of the categories of controls identified.
The City of Lino Lakes is responsible for establishing and maintaining a
system of internal accounting control. The objective of internal accounting
control is to provide reasonable, but not absolute, assurance as to the safe-
guarding of assets against loss from unauthorized use or disposition, and the
reliability of financial records for preparing financial statements and main-
taining accountability for assets. The concept of reasonable assurance recogni-
zes that the cost of a system of internal accounting control should not exceed
the benefits derived and also recognizes that the evaluation of these factors
necessarily requires estimates and judgments by management.
City of Lino Lakes, Minnesota
Management Report, Page 38
There are inherent limitations that should be recognized in considering the
potential effectiveness of any system of internal accounting control. In the
performance of most control procedures, errors can result from misunderstanding
of instructions, mistakes of judgment, carelessness, or other personal factors.
Control procedures whose effectiveness depends upon segregation of duties can be
circumvented by collusion. Similarly, control procedures can be circumvented
intentionally by management either with respect to the execution and recording of
transactions or with respect to the estimates and judgments required in the pre-
paration of financial statements.
Also, projection of any evaluation of the system to future periods is subject
to the risk that the procedures may become inadequate because of changes in con-
ditions and that the degree of compliance with the procedures may deteriorate.
Our study and evaluation made for the limited purpose described in the first
paragraph would not necessarily disclose all material weaknesses in the system.
Accordingly, we do not express an opinion on the system of internal accounting
control of the City of Lino Lakes taken as a whole. However, our study and eva-
luation disclosed that a substantial portion of the accounting processes are per-
formed by a single employee. Ideal conditions call for segregation of duties to
establish a system of internal testing of procedures performed. Additionally,
our evaluation disclosed that the City does not maintain a system of control over
fixed assets. These conditions are common to cities of this size. Any modifica-
tion of internal controls in these areas must be viewed from a cost /benefit
perspective.
These conditions were considered in determining the nature, timing, and
extent of the audit tests to be applied in our examination of the December 31,
1986 financial statements, and this report does not affect our report on the
financial statements dated June 16, 1987.
This report is intended solely for the use of the City of Lino Lakes and
should not be used for any other purpose.
Developer Deposits
The City collects deposits from developers for costs which the City incurs during the
permit process. Remaining amounts are returned to the developer. The City's system of
calculating amounts to be returned to developers does not always produce adequate
verifiable documentation. We recommend that the City review the system and improve
reconciliation procedures. Our office is available to assist in this review.
City of Lino Lakes, Minnesota
Management Report, Page 39
Investment Transactions
The City maintains subsidiary listings of investment activity. These records are
reconciled to the accounting system. Certain investment purchases and sales were not
recorded on the subsidiary listing. We recommend that the City review investment
recording procedures to assure that all investment activity is recorded on a timely
basis.
Financial Accounting System
During 1985, the City purchased an in -house computer system. This system is
intended to provide the City with the following:
• Payroll system.
• Utility billing system.
• General ledger accounting.
• Word processing.
The utility billing system, payroll and word processing have been implemented. Our
review of this portion of the system indicated that it was functioning as intended.
The general ledger accounting system was not functional as of December 31, 1986.
The City is reviewing the general ledger package and had projected an implementation
date in 1987. We recommend that the City reconsider the viability of implementing
the general ledger package because MECC has eliminated support of the system. The
City does have computer spread sheet capabilities which would be useful in budgeting
and other applications. We recommend that the City consider using the existing hard-
ware for this purpose. However, we strongly recommend that all computer applications
be reviewed to determine if they should be continued without support. We are
available to assist the City in this area.
City of Lino Lakes, Minnesota
Management Report, Page 40
Summary
During 1987, the City should:
• Review the provisions of State legislation to prepare for the 1988 levy /budget
process. (Page 1)
• Monitor compliance with the payment terms of the SBA loan. (Page 7)
• Consider adopting a policy on investing. (Page 7)
• Consider the option of requesting unused MSA construction allotments for main-
tenance purposes. (Page 8)
• Prepare a delinquent listing of property taxes to determine if such delinquen-
cies are concentrated in certain areas of the City and to determine if an
adverse trend is developing. (Page 8)
• Monitor the collection rate of special assessments and provide supplemental
financing if collections are not adequate to meet bonded debt payments.
(Page 10)
• Levy the portion of scheduled property taxes required to meet bonded debt
payments. (Page 10)
• Consider the benefits of implementing a general fixed asset system in the
future. (Page 11)
• Expend the remaining balance in the Federal Revenue Sharing Fund in 1987 to
effectively close the fund. (Page 15)
• Prepare cash flow schedules for future bond issues to assure that adequate cash
will be on hand in the fund prior to scheduled debt payments. (Page 16)
• Fund the City share of the LAWCON Fund deficit from the General Fund or other
designated City sources.
• Monitor the projected balance in the Improvement Bonds of 1977 Fund and develop
a plan for the intended use of the balance available upon final payment in 1987.
(Page 22)
• Plan for the use of the remaining balance in the Improvement Bonds of 1980 Fund.
(Page 23)
• Consider establishing a Closed Bond Fund in 1987 and transfer the residual
balances of the 1980 Bond Fund. (Page 23)
• Monitor the results of the Improvement Bonds of 1981 and 1983 annually.
(Page 23)
• Review the financing of the Improvement Bonds of 1984 Fund and provide addi-
tional financing if required. (Page 25)
• Consider securing permanent financing for the Temporary Improvement Bonds of
1985 in 1987 if rates are favorable. (Page 25)
City of Lino Lakes, Minnesota
Management Report, Page 41
• Limit the $24,400 liability to the MWCC in 1987 and close the Baldwin Lake Fund
to the Improvement Bonds of 1983 Debt Service Fund. (Page 27)
• Designate a financial source and eliminate the Lakes Addition #7 Fund in 1987.
(Page 27)
• Close the Tomahawk Trail/Weber's Addition Fund in 1987 to the Improvement Bonds
of 1985 Debt Service Fund. (Page 27)
• Eliminate the deficit in the Reiling Road Fund in 1987 through a City Council
designated transfer. (Page 28)
• Close the Rice Lakes Estates Addition Fund to the Temporary Improvement Bond
Fund after final completion of construction. (Page 28)
• Clarify the policy relating to when transfers for administrative construction
charges should be made. (Page 30)
• Monitor the effects of changes in MWCC district structure and consider such
changes on the City's sewer rates. (Page 32)
• Continue to maintain detail records of amounts due from developers and assure
that adequate deposits are received prior to incurring expenses on a developer's
behalf. (Pages 35 and 38)
• Establish review procedures to project gas utility revenue earnings and compare
to actual results. (Page 37)
• Review investment recording procedures to assure that all investment activity is
recorded on a timely basis. (Page 38)
• Review computer applications to determine alternatives. (Page 39)
Respectfully submitted
j/..4.■ �,,. , /e94sw - eve' °-
VOTO, TAUTGES, REDPATH & CO., LTD.
Certified Public Accountants
June 25, 1987