HomeMy WebLinkAboutManagement Report and Recommendations 12/31/1984CITY OF LINO LAKES, MINNESOTA
MANAGEMENT REPORT AND RECOMMENDATIONS
DECEMBER 31, 1984
VOTO, REARDON, TAUTGES & CO., LTD.
CERTIFIED PUBLIC ACCOUNTANTS
VLSI:
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
TIMOTHY E. REARDON, CPA
ROBERT G. TAUTGES, 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 state-
ments, 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 two most prevalent revenue sources for Minnesota cities are property
taxes and State shared revenues. The limits for each of these revenue sources
is established by State statutes. In order for City government to responsibly
budget services and at the same time protect the financial integrity of the
city, State legislation must be closely monitored. To assist the City in this
regard, we have gathered historical data and each year have prepared reports for
our client cities. As the 1985 legislative session progresses, we will continue
efforts in this regard. At the completion of the session, we will update our
data and forward information to the City Council.
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS • PRIVATE COMPANIES PRACTICE SECTION
MINNESOTA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
MUNICIPAL 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 1984 and 1983 were $1,158,367 and $930,753 as
follows:
351
Local taxes
Licenses and permits
Intergovernmental revenue:
State
Federal
Charges for services
Court fines
Interest on investments
Other
Totals
1984
1984
Amount Percent
$ 510,245 44.04%
91,332 7.88
403,127 34.80
36,227 3.13
75,254 6.50
26,784 2.31
3,607 .32
11,791 1.02
$1,158,367 100.00%
81
41 31
441
381
▪ Property Taxes
® Federal Revenue
AU Other
Licenses & Permits
❑ Charges for Services
IN State Revenue
1983
Amount Percent
$ 355,684 38.21%
75,096 8.07
349,076
30,575
80,697
24,263
1,771
13,591
37.50
3.29
8.67
2.61
.19
1.46
$ 930,753 100.00%
1983
81
381
City of Lino Lakes, Minnesota
Management Report, Page 3
Since 1979, State aids and local property taxes used to finance the General Fund of
the City of Lino Lakes were as follows:
Year
1 979
1980
1981
1982
1983
1984
State Aids
Amount Percent
$184,184 35.05%
239,622 39.57
300,971 41.92
283,089 36.63
349,076 37.50
403,127 35.98
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 45.54
A graph of the above primary funding sources is as.follows:
State Revenue vs Property Taxes
1979
1980
1981
1982
1983
State Revenue 0 Property Taxes
1984
City of Lino Lakes, Minnesota
Management Report, Page 4
The above total State aids consist of the following amounts:
State Aids 1979 1980 1981 1982 1983 1984
Local Government Aid $127,963 $146,504 $157,862 $148,794 $171,011 185,196
Homestead Credits 43,450 78,792 112,911 111,829 139,767 188,906
Police Aid 10,158 11,296 12,188 14,326 14,245 13,970
MSA - Streets 8,080 -0- 13,110 13,935
Other Aids 2,613 3,030 9,930 8,140 10,943 1,120
Totals $184,184 $239,622 $300,971 $283,089 $349,076 403,127
Percent change 30.10%
25.60% (5.94 %)
23.31% 15.48%
Local government aid had decreased in 1982, but changes to the allocation formula
and total amount allocated to the City of Lino Lakes increased the 1983 local government
aid for the City of Lino Lakes by $22,217. The City received in 1983 an amount equal to
the 1982 allocation before State aid cuts due to the State budget situation. The 1984
increase represents and 8.3% increase. A portion of the increase is attributed to a
change in State policy regarding the wetlands credit and attached machinery aid. These
aids were eliminated and local government aid was increased.
$500000 -
State Revenues
1979
1980
1981 1982
Year
1983
111 All Other 0 Homestead Credit 1 Local 6ovint Aid
1984
City of Lino Lakes, Minnesota
Management Report, Page 5
Total expenditures for these funds for 1984 and 1983 were $1,008,507 and $863,752 as
follows:
28R
Current:
General government
Public safety
Highways and streets
Parks
Other
Capital outlay
Totals
1984
Amount Percent
$ 259,556
382, 907
279,375
49, 744
10,050
26,875
1983
Amount Percent
25.74% $ 220,144 25.49%
37.97 366,917 42.49
27.70 219,429 25.40
4.93 42,019 4.86
1.00 5,597 .64
2.66 9,646 1.12
$1,008,507 100.00% $ 863,752 100.00%
A graphic illustration of the above 1984 and 1983 expenditures is as follows:
6R
1984
3R
25R
38X
26R
5R
1983
1R
1 General Gov'nt
® Public Safety
Streets & Hwy's
® Parks & Other
❑ Capital Outlay
43R
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 1984 Annual Financial Report. The following comments relate to those state-
ments.
Cash and Investments
Cash and Investments held by the City at December 31, 1984 totaled $541,791 as com-
pared to 1983 balance of $581,790. These balances were deposited in various accounts
and investments are summarized below:
December 31, Increase
Description 1984 1983 (Decrease)
Treasurer's balance - checking $(23,450) $ 3,219 $(26,669)
Petty cash 150 150
Investments:
Certificate of deposits 300,000 400,000 (100,000)
Small Business Administration
(SBA) 80,926 100,630 (19,704)
Government National Mortgage
Association 98,727 98,727
Savings account 15 (15)
NOW account 85,438 77,776 7,662
Totals
$541,791 $581,790 $(39,999)
The City in 1983 had interest earnings on investments of $33,226 as compared to 1984
earnings of $45,284. The increase in interest earnings was directly effected by
increasing interest rates available. In 1983, rates ranged from 8% to 9.25% and in 1984
ranged from 8.5% to 12.25 %. Additionally, the average cash available to invest
throughout 1984 was greater than the prior year.
During 1984 and 1983, the City maintained an average negative balance of approxima-
tely $24,000 and $27,000 respectively 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 recom-
mend that the City continue this practice of minimal balances in the City's checking
account.
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.
Certain other investments are not legal for Minnesota cities. We recommend that all
proposed new investments be carefully reviewed in conjunction with Minnesota Statutes.
Securities For Deposit
Minnesota Statutes (MS 118) require cities to maintain specific levels of collateral
for deposits in excess of Federally insured amounts. The City maintained sufficient
collateral for all depositories at December 31, 1984.
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, 1984. The following schedule
details these amounts.
Description
December 31,
1984 1983
State:
Fines and forfeits $ 4,973 $ 1,705
MSA 13,110
LAWCON 29,386
Federal:
Community Development Block Grant 24,863 43,387
Federal Revenue Sharing 10,347 8,626
LAWCON 2,940
Local:
MWCC - Maintenance Agreement 3,610 3,765
Final cost allocation 2,240 911
City of Centerville -
Building Inspector Contract 360 1,402
Police contract 11,212 10,447
Total $ 86,991 $ 86,293
During 1984, the City received $13,935 of MSA maintenance aid. Additionally,
there is a "construction" balance available at December 31, 1984 of $268,489. This
amount can be drawn by the City upon approval /completion of MSA road improvements. We
recommend that the City draw down the maximum amount available as qualifying projects
are approved.
City of Lino Lakes, Minnesota
Management Report, Page 8
A concept for the City to consider in the planning process for this fund is the
ability to assess a portion of a project (based on lateral benefit) and to draw down
full project costs for MSA. This practice is acceptable and allows the City to main-
tain an MSA cash balance which is available for other MSA projects. The advantage of
utilizing this system is that an equitable charge is made to property owners along the
MSA route (which is comparable to what other property owners would pay) and the City
increases the amount of cash available for other such improvements.
The Community Development Block Grant receivable represents the amount of grant
earned through the construction of the Senior Citizen Facility and for funding of the
Alexander House (see later comments).
The police contract receivable represents the fourth quarter of 1984 payment.
Taxes Receivable
Delinquent taxes receivable were as follows for 1982 through 1984:
1984 1983 1982
Delinquent balance - January 1 $ 84,603 $ 81,671 $ 44,254
Current levy
Total receivable
690,000 587,845 544,842
774,603 669,516 589,096
Receipts:
County:
Current 467,696 380,063 332,566
Delinquent 33,045 34,223 23,750
State 187,721 170,627 139,283
Total receipts 688,462 584,913 495,599
Unadjusted balance
Homestead credit loss
86,141 84,603 93,497
11,826
Delinquent balance $ 86,141 $ 84,603 $ 81,671
Total collections as a percent
of current levy 100% 99% 91%
In 1983 and 1984, the collection rates were much improved over the preceding years.
Property taxes are a primary revenue source of the City. We recommend that the City
monitor the collection rate for property taxes and prepare revenue operation budgets
based on the expected delinquency rate.
City of Lino Lakes, Minnesota
Management Report, Page 9
Special Assessments Receivable
Special assessments receivable consisted of the following:
Delinquent
Deferred
Tax forfeit
City property
Delinquent - not spread for
collection
Total
December 31,
1984 1983
$ 182,722 $ 123,970
610,715 746,489
8,578 18,373
121,241 122,524
8,446
Increase
(Decrease)
$ 58,752
(135,774)
(9,795)
(1,283)
(8,446)
$ 923,256 $1,019,802 $(96,546)
Delinquent assessments consist of amounts which were spread for collection in 1984
and prior years which have not yet been received. For 1982 through 1984, special
assessment collections were as follows:
Delinquent balance - January 1
Add:
Current installment
Delinquent - previously not
spread for collection
Amount collectible
Less:
Current collections
Delinquent collections
Total collections
Adjustments
Delinquent balance - December 31
Total collections as a percent
of current levy
1984 1983 1982
$123,970 $ 31,780 $ 16,356
201,280 227,230 215,629
8,446
333,696 259,010 231,985
124,395
25,945
150,340
123,535
6,578
130,113
(634) (4,927)
185,968
14,237
200,205
-0-
$182,722 $123,970 $ 31,780
75%
57%
93%
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
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City of Lino Lakes, Minnesota
Management Report, Page 10
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 $121,241 at December 31, 1984. This
amount has decreased during 1984 by a partial payment received from the County. 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. We recommend that the City deter-
mine if the amounts are fully recoverable and that interim financing be provided through
scheduled property tax levies for the related debt service fund.
There were two parcels on an assessment roll which had not been spread for collec-
tion in error. The County, however, had not spread the amounts related to these two
parcels for 1982. For 1983 and 1984, the County has spread the 1982 through 1984 por-
tions for both parcels. This error emphasizes the need for continued monitoring of
County collections. This situation was caused (in part) by the lack of communication of
editing of assessment rolls by the County (i.e., adjustments to rolls submitted are not
sent to the City).
The City effects special assessment collections through Anoka County as a collection
agent. This agency arrangement has advantages to the City primarily in saving admi-
nistrative 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
City of Lino Lakes, Minnesota
Management Report, Page 11
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.
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 $1,000,000 at December 31, 1984.
The pending acquisition of an in -house computer may allow for automated tests of
special assessment balances. We recommend that the City consider the needs related to
special assessments in the process of acquiring the system.
Assessments related to the Baldwin Lake Improvements are collected through a develo-
per's agreement. The assessments, however, are apparently not recorded as a lien
against the property (at the County). We recommend that such a lien be effected to
further protect the City's interest.
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
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 consider the
benefits of implementing a general fixed asset system at some future date. The acquisi-
tion of an in -house computer may improve the efficiency of establishing fixed asset
records.
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City of Lino Lakes, Minnesota
Management Report, Page 12
Fund Equity
Fund
Fund Balance:
General Fund
Special Revenue Fund:
Revenue Sharing
Debt Service:
1981 Certificates of Indebtedness
Capital Projects:
Parks and Playgrounds
1981 Certificates of Indebtedness
Community Development Block Grant
LAWCON Grant
City Hall Expansion
Special Assessment:
Improvement Bonds of 1977
Improvement Bonds of 1980
Improvement Bonds of 1981
Improvement Bonds of 1982
Improvement Bonds of 1983
Improvement Bonds of 1984
(amount to be provided)
Lakes Addition #7
Baldwin Lake Mobile Home Court
Tomahawk Trail
Reiling Road
Totals
Retained Earnings:
Sewer and Water Fund
Grand Totals
Fund Position (Deficit)
December 31,
1984 1983
Increase
(Decrease)
$ 242,923 $ 131,116 $ 111,807
12,173 11,768 405
-0- 2,361
111,162 105,457
14,394 15,998
(14,474) 1,992
(41,027) (1,474)
(50,866) (51, 135)
14,551 12,765
44,593 48,390
15,364 13,457
221,557 207,976
11,211 8,977
(1,140)
(22,584) (22,584)
8,473 9,344
(15,411)
(2,189)
548,710 494,408
7,285
6,927
(2,361)
5,705
(1,604)
(16,466)
(39,553)
269
1, 786
(3, 797)
1,907
13,581
2,234
(1,140)
(871)
(15,411)
(2,189)
54,302
358
$ 555,995 $ 501,335 $ 54,660
The following section of this report relates to the various changes in the fund
positions.
City of Lino Lakes, Minnesota
Management Report, Page 13
1
General Fund
The financial statements for the General Fund are presented in Statement 6 and 7 of
the 1984 Annual Financial Report. The fund balance of the General Fund was $242,923 at II
December 31, 1984 representing a $111,800 increase in fund balance during 1984 as result
of the following:
Budgeted decrease in fund balance $ (21,500)
Actual revenues over (under) budgeted revenues:
Tax collections $ 8,000
Licenses and permits 19,400
Intergovernmental revenue 800
Charges for services 12,600
Court fines 9,800
Miscellaneous 3,500
Net revenue over budget
Actual expenditures over (under) budgeted
expenditures:
General government (58,900)
Public safety (18,400)
Highways and streets 3,100
Parks (5,000)
Net expenditures (under) budget
54,100
(79,200)
Total improvement $ 111,800
Statement 7 of the 1984 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
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City of Lino Lakes, Minnesota
Management Report, Page 14
Although the City increased the overall fund balance by $111,800, 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.
• City hall improvements which the City had budgeted in
the General Fund. These amounts have been accounted
for in a separate Capital Project Fund. A 1985
transfer will be required to fund this project.
Total
$ 30,000
65,000 ,
$ 95,000
A graphic illustration of fund balance compared to expenditures and transfers out is
as follows:
1200000 -
1000000 -
800000 -
600000 -
400000 -
200000 -
0
- 200000 -
General Fend - Exponditares
vs Undesiynated Fund Balance
1978
1979
1980
1981
1982
1983
0 Expenditures and Transfers 1 Fund Balance
1984
City of Lino Lakes, Minnesota
Management Report, Page 15
The City has not achieved a sound fund balance level for its General Fund. An ade-
quate level is required to meet several basic needs as follows:
• Timing in receipt of major revenue sources. Property taxes are primarily
received by the City in July and December. Additionally, major State aids
(local government aid and homestead credits) are received in six monthly
installments starting in July. A majority of expenditures are incurred
evenly throughout the year yet two of the major funding sources are not
available until after one -half of the operating cycle has elapsed. Cities
must therefore maintain a reserve balance to fund the delivery of basic ser-
vices for the six months of the year prior to receiving these major revenue
sources.
• Cities are often under statutory restrictions which regulate the amount of
property taxes which can be levied for an operating year. Additionally,
there are self - imposed restrictions on the amount of property taxes which a
city is willing to tax its citizens in light of increasing school district,
county, and other taxing authority increases. Property tax revenue is
therefore (oftentimes) a limited financing source for cities. Additionally,
full collection of these property taxes is not assured. Delinquent property
taxes reduce the amount available for expenditure during the current
operating cycle.
• Intergovernmental revenue. The Federal government, the State government and
other local units of government are addressing budget shortfalls. Solutions
to their budget problems are often directly passed through to cities.
Intergovernmental revenues historically have been a primary funding source
for delivery of basic services by Minnesota cities. As these aids are
reduced, the overall revenue available to fund expenditures is impaired.
The receipt of major revenues available for the City to finance basic services are
limited and are not received in a timely manner (i.e., they do not match the City's
operating expenditure cycle). Additionally, as described above, necessary expenditure
levels are often affected by factors which are beyond the City's direct control. For
these reasons, cities must maintain operating reserve balances in their General Fund.
The reserve balance must be maintained at a level which will:
• Assure the continuing ability to provide basic services during temporary periods
of economic crisis (such as high inflation rates).
• Meet cash flow timing differences.
• Be adequate and available to meet emergency and /or unanticipated expenditures.
• Be adequate to offset intergovernmental revenue shortfalls on a short -term basis
(i.e., when cuts are made after the operating budget for the City is
established).
• Be available to provide supplemental financing for other City projects
(optional).
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City of Lino Lakes, Minnesota
Management Report, Page 16
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.
The City's minimum cash flow reserve requirement is measurable. For the City of
Lino Lakes, the minimum required surplus is $485,500 computed as follows:
1985 Budgeted Levy (Includes Homestead Credit)
1985 Anticipated Local Government Aid
Total
$ 775,000
196,000
$ 971,000
Minimum Required Cash -Flow
Reserve (One -Half of Total) $ 485,500
The City improved the financial position and undesignated reserve balance of the
General Fund over the past year. We encourage the City to increase efforts toward
improving this financial position until an appropriate level of reserve balance is
achieved.
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.
City of Lino Lakes, Minnesota
Management Report, Page 17
Without an adequate General Fund reserve, the independence and autonomy of the City
may be impaired. The City of Lino Lakes has taken actions over the past year to improve
the financial position of its General Fund. We commend the City for these actions and
encourage the City to continue efforts in this area. An adequate reserve structure will
enable the City to retain its financial independence and integrity.
Special Revenue Funds
The financial statements of the Special Revenue Funds are presented in Statements 8
and 9 of the 1984 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 $12,173 at December 31, 1984 consists of the fourth quarter allotment
receivable ($10,347) and accumulated interest earned over the past year. The City has
appropriated the 1985 entitlement for the Fire Department.
The rules and regulations of the Office of Revenue Sharing are considerable (and are
subject to frequent change). Certain requirements deal with publications of notices.
The City did meet all the publications requirements for 1984 with minor exceptions.
recommend that the City publish all required notices and monitor the notices to assure
compliance with Revenue Sharing regulations.
In 1983, the Revenue Sharing Regulations were amended to require recipients to
comply with the administrative requirements of the Revenue Sharing Handicapped regula-
tions which were previously deferred. The requirements which affect the City of Lino
Lakes are as follows:
Requirement
• Publish a statement that recipient does not
discriminate against handicapped persons.
• Conduct a self evaluation.
• Make necessary nonstructural changes to
achieve program accessibility.
• Prepare a transition plan where structural
changes are necessary and make such structural
changes within three years.
Deadline
January 17, 1984
October 17, 1984
October 17, 1984
October 17, 1984
City of Lino Lakes, Minnesota
Management Report, Page 18
The City has prepared documents to substantiate the self - evaluations. The eva-
luation determined that no structural changes are required.
Current pending Federal legislation indicates that Revenue Sharing may be curtailed
or eliminated. We recommend that the City anticipate the effects of such legislation
and prepare plans for substitute financing of expenditures which have been funded by
Revenue Sharing (or plan to eliminate programs for which adequate funding is no longer
available). The City's last Revenue Sharing audit was for the year ended December 31,
1981. An audit will be required for 1984 to be submitted in 1985. We will forward and
engagement letter for Council approval. The report is required to be submitted by
August 31, 1985.
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 1983 (the 1981 Certificates of
Indebtedness). During 1983, the City retired this remaining issue and in 1984, closed
this fund through a transfer to the 1981 Certificates of Indebtedness Capital Project
Fund.
Capital Project Funds
The financial statements for the City's Capital Project Funds are presented in
Statements 11 and 12 of the 1984 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, 1984
and 1983 were:
December 31, Increase
Fund 1984 1983 (Decrease)
Parks and Playground $ 111,162 $ 105,457 $ 5,705
1981 Certificates of Indebtedness 14,394 15,998 (1,604)
Community Development Block Grant (14,474) 1,992 (16,466)
LAWCON Grant (41,027) (1,474) (39,553)
City Hall Expansion (50,866) (51,135) 269
Totals $ 19,189 $ 70,838 $(51,649)
City of Lino Lakes, Minnesota
Management Report, Page 19
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Parks and Playground
This fund was established to account for dedicated park fees. The fund balance of
$111,162 at December 31, 1984 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 $6,820 at
December 31, 1984.
The City uses the Parks and Playgrounds Fund to collect both ordinance restricted
fees and donations from various groups. The fees collected under the ordinance have
restricted uses and must be used accordingly. The donations from various groups have
designated uses and should be expended accordingly. We recommend that all such
designated monies be listed and maintained for the appropriate purposes.
1981 Certificates Of Indebtedness
The 1981 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 1984:
Over
(Under)
Description Budget Actual Budget
Police Cars $ 22,000 $ 32,293 $ 10,293
Dump Truck 58,000 50,506 (7,494)
Tractor 12,000 18,503 6,503
1 -Ton Truck 11,000 11,416 416
Squad Car Equipment 4,400 3,469 (931)
Wing Plow 4,000 2,708 (1,292)
Totals $ 111,400 $ 118,895 $ 7,495
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City of Lino Lakes, Minnesota
Management Report, Page 20
The City completed the purchase of all the above budgeted equipment during 1984.
The following schedule summarizes the activity of this fund through December 31, 1984.
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Proceeds for issuance of certificates
Interest earnings:
1981
1982
1983
1984
Property taxes
Transfer from Debt Service Fund
Total revenue provided
Expenditures:
1981
1982
1983
1984
$ 111,400
1,288
9,901
1,758
1,300
5,252
2,390
2,707
55,136
50,506
10,546
$ 133,289
Total expenditures 118,895
Fund balance - December 31, 1984 $ 14,394
The scope of the fund was increased to accommodate the purchase of two additional
police cars. The additional funding was provided by:
• accumulated interest earnings.
• property taxes.
• amounts "under budget" on other purchases.
The remaining fund balance is available for transfers or expenditures at the discre-
tion of the City Council. We recommend that the City council take formal action to
close this fund in 1985.
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 will have to comply with the provisions of
the grant agreement. In prior years, there had been several instances of apparent non-
compliance with Davis Bacon Act provisions by contractors involved with the Senior
City of Lino Lakes, Minnesota
Management Report, Page 21
Citizens construction. This is one area of compliance involved with Federal CDBG
programs. The City has determined the compliance procedures that are required to be
documented in City records. Proper documentation with the grant agreement will aid the
City in receiving the monies applied for in reimbursement of City expenditures.
The CDBG allotments for 1982 to 1985 have been appropriated for the following pur-
poses:
Senior
Alexander Citizen Total
House Facility Allotments
1982 $ 10,000 $ 74,889 $ 84,889
1983 -0- 39,179 39,179
1983 (Supplemental) 12,434 12,434
1984 3,000 25,000 28,000
1985 7,367 7,367
Total
$ 13,000 $158,869 $171,869
The total amount needed to finance the Senior Citizen facility per the cost estimate
by the City was $126,502. The City subsequently expanded the scope of the project to
include kitchen facilities, parking, landscaping and lighting.
The following schedule summarizes the activity of this fund through December 31,
1984:
Revenue:
County of Anoka Community Development
Block Grant $ 148,502
Expenditures:
1982
1983
1984
$ 5,316
93,375
64,285
Total expenditures
Fund balance (deficit) - December 31, 1984
Less: Designated for committed contracts
162,976
(14,474)
(25,215)
Adjusted balance (deficit) $ (39,689)
The additional funding for this project is anticipated to be funded by additional
CDBG grants and partial funding from the Metropolitan Council.
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City of Lino Lakes, Minnesota
Management Report, Page 22
City Hall Expansion
In 1983, the City expanded the CDBG project to include City Hall upgrading. This
part of the construction has been presented separately in the Capital Project financial
statements. The City had budgeted the expenditures of this construction in the General
Fund for 1984. The construction of a general government (non- assessable) facility is
more appropriately accounted for in a Capital Project Fund and therefore all such acti-
vity has been segregated. The December 31, 1984 fund balance includes an amount
designated to fund this project. We recommend that the City amend the 1985 operating
budget of the General Fund and transfer an adequate amount to close this fund upon pro-
ject completion in 1985.
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.
We recommend that the City develop controls to insure that all expenditures related
to grants are properly documented and required requests for payments to the granting
agency are filed on a timely basis.
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
$ 30,096
32, 247
5,069
Expenditures:
Contractor 92,985
Engineering 13,642
Other 1,812
Total expenditures
$ 67,412
108,439
Fund balance (deficit) - December 31, 1984 $(41,027)
City of Lino Lakes, Minnesota
Management Report, Page 23
The above fund deficit ($41,027) 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
The scope of the improvements may change if the beach part of the project has a
silting problem. The completion of the grant (and the construction of the beach house)
may be delayed pending the outcome of the beach improvement.
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 effort which meet
certain grant criteria). As the City incurs expenditures, we recommend that the City
annually 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
13 and 14 of the 1984 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.
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City of Lino Lakes, Minnesota
Management Report, Page 24
The nature of a Special Assessment - Debt Service Fund is such that it will not
reflect a fund deficit. In a fund which would reflect a deficit an "amount to be provi-
ded" is reported to increase the fund equity to zero. This "amount to be provided" is
each funds' supplemental financing requirement. This supplemental financing primarily
will consist of future tax levies (scheduled and /or unscheduled) but can be realized
through future interest on investments, permanent transfers in and /or other City Council
designated sources.
Presented herewith, are projected financial positions 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.
Debt Service Fund
Improvement Bonds of 1977
Improvement Bonds of 1980
Improvement Bonds of 1981
Improvement Bonds of 1982
Improvement Bonds of 1983
Improvement Bonds of 1984
Totals
Fund Scheduled
Position Future
12/31/84 Tax Levies
$ 14,551
44,593
15,364
221,557 $ 231,502
11,211
(1,140) 940
$ 306,136 $ 232,442
Future Interest Projected
Add: Deduct: Fund
Assessments Bonds Position
$ 1,800 $ 1,896 $ 14,455
9,300 9,900 43,993
16,800 15,100 17,064
145,500 241,225 357,334
52,700 40,150 23,761
14,900 17,735 (3,035)
$ 241,000 $ 326,006
Total projected fund position
Less: Tax forfeit and City property assessments included in projections
Adjusted projected fund position
Statutory reserve (5% of unmatured bond requirements)
Excess projected fund position
453,572
129,819
323,753
64,300
$ 259,453
Year of
Final
Maturity
1987
1986
1991
1991
1993
The overall actual and projected fund positions of the Special Assessment Funds
indicate that these bond funds are adequately financed at December 31, 1984. 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).
City of Lino Lakes, Minnesota
Management Report, Page 25
Improvement Bonds of 1977
The projected balance of $14,500 represents a $1,800 increase during 1984. This
decrease was a result of the following:
Projected balance - January 1, 1984
Change in future interest on assessments
Interest on investments
$ 12,700
(100)
1,900
Projected balance - December 31, 1984 $ 14,500
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.
Improvement Bonds of 1980
The projected fund position of $44,000 decreased by $6,900 during 1984 as follows:
Projected balance - January 1, 1984
Change in future interest on assessments
Special assessment adjustments
$ 50,900
(2,300)
(4,600)
Projected balance - December 31, 1984 $ 44,000
The special assessment adjustments were for the correcting of an error related to
County correlation with City records (see earlier commentary under "Special
Assessments ").
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. We recommend that the City monitor
this situation to insure timely availability of cash assets to meet bond principal and
interest payments. The fund has a cash deficit of $47,300 at December 31, 1984.
The City should also provide supplemental financing in the form of supplemental tax
levies if determined to be necessary.
City of Lino Lakes, Minnesota
Management Report, Page 26
Improvement Bonds of 1981
The Improvement Bonds of 1981 have a positive projected balance of $17,064 at
December 31, 1984. We recommend that the City monitor the results of this fund
annually.
Improvement Bonds of 1982
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 $121,000 for which payment terms have not been established (see previous
comments). There is also $8,600 of tax forfeit assessments which have no payment terms
and $92,000 of delinquent assessments receivable.
The fund experienced a 1984 collection rate on current assessments receivable of
70 %. The fund does have future scheduled tax levies of $267,764. The City, however,
cancelled the 1983/84 levy of $36,244 and the 1984/85 levy of $36,262.
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 $23,761 at
December 31, 1984. We recommend that the City monitor the results of this fund
annually.
City of Lino Lakes, Minnesota
Management Report, Page 27
Improvement Bonds of 1984
The Improvement Bonds of 1984 has a projected deficit of $3,035 at December 31,
1984. This projected deficit is the result of an under - assessment of the project as
follows:
Actual costs - December 31, 1984 $ 32,370
Estimated additional costs 2,500
Capitalized interest -0-
Total 34,870
Amount assessed 30,370
Difference $ 4,500
We recommend that the City review the financing of this fund and provide adequate
financing as required.
Lakes Addition #7
Lakes Addition #7 has had the following transactions from inception:
Miscellaneous Revenue
Construction Funds
Preliminary Construction Costs
1982 and 1983 and
Prior 1984 Total
$ 183 $ -0- $ 183
$ 22,767 -0- 22,767
Fund balance (deficit) -
December 31, 1984 $ (22,584)
The above deficit should be funded through a permanent bond sale to finance the pro-
ject. If the project is not ordered, the City may charge the developer directly through
a letter of credit arrangement. We recommend that the City review the status of this
fund and take action to eliminate the accumulated cash overdraft.
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
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City of Lino Lakes, Minnesota
Management Report, Page 28
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
1984.
This project is complete at December 31, 1984. We recommend that this fund be
closed in 1984 to the Improvement Bonds of 1983 Debt Service Fund. Council authoriza-
tion is required to effect this closing.
Tomahawk Trail
The City began this project in 1984. The project is scheduled for completion in
1985.
This project was done without bonding. Smaller projects may not be cost effective
to bond for individually. Cash overdrafts caused by unbonded projects, however, can
disrupt the overall cash position of the City. We recommend that the City carefully
consider the effects of completing projects without funding sources.
Reiling Road
This project was financed by the Improvement Bonds of 1984. Construction is sche-
duled for completion in 1985. The fund deficit at December 31, 1984 was $2,189. We
recommend that the City eliminate this deficit in 1985 through:
• assessment prepayments.
• other City Council designated transfers.
Interim Construction
Currently, when the City incurs preliminary (feasibility) studies for projects, the
costs are coded to the General Fund. If the proposed project is subsequently approved,
the City researches past project costs which had been coded to the General Fund (i.e.,
engineering, legal, planning, etc.). This is required to include all related project
costs in the eventual assessment roll.
City of Lino Lakes, Minnesota
Management Report, Page 29
An alternative system would be to establish an (unfunded) Interim Construction Fund.
All preliminary project costs could be tabulated (by project) in this fund. If the pro-
ject is approved, past costs would be reclassified to a permanent (bonded) special
assessment construction fund. If the project is cancelled, a transfer would be required
from the General Fund (or another financing source). The use of an Interim Construction
Fund would provide greater assurance that all preliminary costs were accurately tabu-
lated. We recommend that the City consider the use of an Interim Construction Fund.
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.
The policy (as approved) requires annual transfers of administrative charges from
the special assessment debt service funds. We are unaware of statutory authority,
however, which allows for expenditures from bonded debt funds (other than debt retire-
ment payments). The special report issued by the Office of the State Auditor to the
City of Lino Lakes dated February 16, 1982, did not directly address the topic of
charging debt funds for administrative charges. That report dealt with the amount of
such charges. We recommend that the City amend its administrative charges policy
(Resolution 84 -4) to require the full administrative percentage to be charged to the
construction account (during the construction phase).
City of Lino Lakes, Minnesota
Management Report, Page 30
A subsequent letter received from the State Auditor confirms that transfers from
special assessment funds for administrative charges are unacceptable. All such charges
(from debt service) for 1984 were reversed during the year -end closing process.
Enterprise Fund
The Enterprise Fund of the City of Lino Lakes financial statements are presented in
the 1984 Annual Financial Report in Statements 15 through 17.
Presented below are condensed comparative operating statements. Contributed depre-
ciation has not been included in these presentations.
For The Year Ended December 31,
1984 1983
Amount Percent Amount Percent
Operating Income:
Water billings $ 6,011 13.26% $ 5,421 15.03%
Sewer billings 36,417 80.33 27,763 77.02
Other 2,909 6.41 2,862 7.95
Total operating income 45,337 100.00 36,046 100.00
Operating Expenses:
Personal services 14,831 32.71 11,477 31.84
MWCC 23,866 52.64 18,116 50.26
Repairs and maintenance 4,088 9.02 7,810 21.67
Depreciation 838 1.85 838 2.32
Other 8,494 18.73 8,975 24.89
Total operating expenses 52,117 114.95 47,216 130.98
Income (Loss) From Operations
Other Income /(Expenses):
MWCC maintenance agreement
Net Income /(Loss)
(6,780) (14.95 %) (11,170) (30.98 %)
7,138
$ 358
11,010
$ (160)
The operating results of the Water and Sewer Utility Fund increased by $500 from
1983. The increased revenue was primarily the result of increased connections to sewer.
The City should review rates annually and make adjustments to the rates based on costs
incurred and expected to be incurred.
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 1985 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 Not available
1985 30,050 15.1 Not available
A graph of the above data is as follows:
$30000
$25000
$20000
$15000
$10000
$5000
$
1 — . -. -.. + - -.. :. + —::. , 1 1
1977 1978 1979 1980 1981 1982 1983 1984 1985
MWCC Estimated 0 MWCC Actual
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 1985 over
1984 for the City of Lino Lakes is 9.4 %. 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 $815 to an estimated $859. This respre-
sents an increase of 5.2 %. The combination of these factors increased the City's esti-
mated cost in 1985 by 15 %. 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 current charge for sewer users in the City of Lino Lakes is $30 per quarter.
Based on average Lino Lakes usage (22,650 gallons per quarter as computed by the City)
this charge averages to just over 757 per thousand gallons used. The MWCC currently
charges the City of Lino Lakes (estimated for 1984) just over 857 per one thousand
gallons processed. The City is therefore charging average use customers less than the
MWCC charges the City. Variations in this analysis will occur for water which is sold
that does not reach the sewer system (i.e., lawn sprinkling). This revenue /expense com-
parison however reflects only the MWCC expenses incurred. The City also incurs expenses
through administrative and maintenance efforts.
The City has no control over the billings from the MWCC for the sewer treatment
costs. This operating expense comprises 65% of the 1984 customer billings for sewer
service charges. The City must set rates at levels adequate to pay for the pass through
costs from MWCC. 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 operations.
City of Lino Lakes, Minnesota
Management Report, Page 33
Agency Funds
The City maintained three Agency Funds in 1984 as follows:
• Contractor's Deposits
• Minnesota Housing Revenue Bonds
• 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 propsective 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 that adequate deposits are received prior to incurring
expenses on a developer's behalf.
The Minnesota Housing Revenue Bonds Fund was used to account for the application
process related to housing bonds. The remaining balance should be transferred to the
General Fund or returned to the prospective developers as established by the terms
and /or intent of the agreement establishing the fund. The City should close this fund
in 1985.
The Investment Fund is used to "pool" the available cash of the City for efficient
investment. Interest is allocated to City funds based on the average cash available in
that fund throughout the year.
City of Lino Lakes, Minnesota
Management Report, Page 34
Franchise Agreement - Gas Utility
Subsequent to our initial meeting with the City Council in May, 1983, we reviewed
the franchise agreement between the City of Circle Pines and the City of Lino Lakes. In
a letter dated June 29, 1983, we summarized the conclusion of our limited review of the
franchise agreement and operating results of the utility as reported by the City of
Circle Pines. Included in that report were schedules of net income from 1978 through
1983. Those amounts are 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
Six Year
Totals $223,724 72.1% $ 86,742 27.9% $310,466 100.0%
The City of Lino Lakes may receive payment of net income after the accumulated
retained earnings deficit is eliminated. The retained earnings for the gas utilities
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
The above 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 $285,000 while the Lino
Lakes retained earnings account is in a deficit position.
City of Lino Lakes, Minnesota
Management Report, Page 35
The City of Lino Lakes has certain rights with regard to the gas utility franchise
agreement. One of those rights is a purchase option. The 25 year franchise agreement
expires in the latter part of 1986. Prior to expiration, we recommend that the City
address the options available.
The City has raised certain questions with regard to the allocation of operating
results and other questions regarding their rights under the agreement. Interpretation
of legal rights under the agreement should be directed to the City attorney. We are
available to assist in gathering further data upon request.
The City is currently proposing State legislation to assure representation on the
Utility Commission Board for the City of Lino Lakes.
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.
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.
City of Lino Lakes, Minnesota
Management Report, Page 36
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,
1984 financial statements, and this report does not affect our report on the
financial statements dated February 12, 1985.
This report is intended solely for the use of the City of Lino Lakes and
should not be used for any other purpose.
Pre- Dating of Checks
Several checks which were prepared in January, 1985 were pre -dated to December 31,
1984. This practice was apparently designed to match the transaction with the year to
which it relates. There are other methods of accomplishing this match (i.e., the
recording of payables) during the year -end closing process.
Pre - dating (or post- dating) of checks reduces the reliability on the overall
integrity of the disbursing system. We recommend, therefore, that such practices
cease.
City of Lino Lakes, Minnesota
Management Report, Page 37
Depositories /Investment Recording
Minnesota Statutes Ch. 118 require the approval of all depositories of the City.
For 1984, the City overlooked this requirement. We recommend that the City approve
depositories annually.
Currently, and as part of the restriction of the existing accounting system, the
City does not record investment transactions completely on a monthly basis. We recom-
mend that subsidiary records be updated to assure timely recording of all investment
transactions.
Legal Compliance
Minnesota Statutes 6.65 has increased the scope of audit procedures which will be
required to complete the audit of the annual financial report of the City of Lino Lakes
beginning with the 1985 audit. The Statute reads as follows:
6.65 MINIMUM PROCEDURES FOR AUDITORS, PRESCRIBED.
The state auditor shall prescribe minimum procedures and the
audit scope for auditing the books, records, accounts, and affairs
of local governments in Minnesota. The minimum scope for audits
of all local governments shall include financial and legal
compliance audits for fiscal years ending after January 15, 1984.
The state auditor shall establish a task force to promulgate an
audit guide for legal compliance audits. The task force shall
include representatives of the state auditor, the attorney
general, towns, cities, counties, school districts and private
sector public accountants.
The formal guidelines have not yet been issued by the Office of the State Auditor as
directed by the Statutes. The primary reason for the delay is the fact that the
legislature passed the law and did not provide any funds for the State Auditor to
research and establish procedures and guidelines.
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City of Lino Lakes, Minnesota
Management Report, Page 38
The State Auditor anticipates establishing formal procedures in the following areas:
• Deposits and investments. Approval of official depositories of the city
and the providing of security of all deposits which are not insured by
the Federal Government.
• Contracts and bidding. Bid and quote procedures performed by the City
to assure that all contractual purchases are in compliance with existing
State Statute.
• Public indebtedness. Various statutory restrictions on types of debt.
• Claims and disbursements. Purchasing and disbursing procedures of the
City.
• Conflicts of interest. Evidential matter regarding the financial
interest of public officials in any sale, lease or contract of the City.
Our current audit procedures address most of the above areas. Increased procedures
mandated by the State may increase the scope of procedures required.
Statutes do not prohibit official's having an interest in businesses which the City
contracts with, however, it does require that such relationships are disclosed and that
no bias is exercised in the contractual arrangement over other potential vendors.
Excerpts from applicable statutes are as follows:
471.87 PUBLIC OFFICERS, INTEREST IN CONTRACT; PENALTY.
Except as authorized in section 471.88, a public officer who is
authorized to take part in any manner in making any sale, lease, or
contract in his official capacity shall not voluntarily have a per-
sonal financial interest in that sale, lease, or contract or per-
sonally benefit financially therefrom. Every public officer who
violates this provision is guilty of a gross misdemeanor.
471.88 EXCEPTIONS.
Subd. 1. The governing body of any port authority, seaway port
authority, town, school district, hospital district, county, or
city, by unanimous vote, may contract for goods or services with an
interested officer of the governmental unit in any of the
following cases.
City of Lino Lakes, Minnesota
Management Report, Page 39
Subd. 2. In the designation of a bank or savings association
in which the officer is interested as an authorized depository for
public funds and as a source of borrowing, no restriction shall
apply to the deposit or borrowing of any funds or the designation
of a depository by such authority or governmental unit in any bank
or savings association in which a member of the authority or
officer of a governmental unit shall have an interest if such depo-
sited funds are protected in accordance with chapter 118; provided,
however, that any member or officer having such an interest shall
disclose that he is a director or employee of the bank or savings
association, which disclosure shall be entered upon the minutes of
the authority or governmental unit, such disclosure shall be made
when such bank or savings association is first designated as a
depository or as a source of borrowing, or when such member or
officer is elected whichever is later, and such disclosure shall
serve as notice of such interest and need not be made with each
successive transaction;
Subd. 3. The designation of an official newspaper, or publica-
tion of official matters therein, in which the officer is
interested when it is the only newspaper complying with statutory
or charter requirements relating to the designation or publication;
Subd. 4. A contract with a cooperative association of which
the officer is a shareholder or stockholder but not an officer or
manager;
Subd. 5. A contract for which competitive bids are not
required by law and where the amount does not exceed $5,000.
Subd. 6. A contract with a volunteer fire department for the
payment of compensation to its members or for the payment of
retirement benefits to these members;
Subd. 7. A contract with a municipal bond for the payment of
compensation to its members;
Subd. 8. Contracts for goods or services when the considera-
tion does not exceed $5,000 in any year and the contracting govern-
mental unit has a population of less than 5,000;
Subd. 9. When a port authority commissioner is engaged in or
employed by a firm engaged in the business of importing or
exporting or general trade, it shall be lawful for the authority to
do business with the commissioner or his employer provided that in
the fixing of any rates affecting shippers or users of the terminal
facility, said commissioner shall not vote thereon.
Subd. 10. When a seaway port authority commissioner is engaged
in or employed by a firm engaged in the business of importing or
exporting or general trade, it shall be lawful for the authority to
do business with the commissioner or his employer provided that in
the fixing of any rates affecting shippers or users of the terminal
facility, said commissioner shall not take part in the deter-
mination of except to testify, nor vote thereon.
City of Lino Lakes, Minnesota
Management Report, Page 40
Subd. 11. When a commissioner of any public housing or port
authority is employed by a bank engaged in making loans or per-
forming trust services involving real or personal property affected
by any plan or such housing or port authority, as restriction shall
apply to any such loans made or trust services performed by said
bank if the commissioner shall disclose the nature of such loans or
trust services of which he has personal knowledge, which disclosure
shall be entered upon the minutes of such authority.
471.881 EXCEPTIONS; APPLICATION
The exceptions provided in section 471.88 shall apply not-
withstanding the provisions of any other statute or city charter.
471.89 CONTRACT, WHEN VOID
Subd. 1. Procedure followed. A contract made pursuant to sec-
tion 471.88, subdivision 5, is void unless the procedure prescribed
by subdivision 2 and 3 is followed.
Subd. 2. Resolution by governing body. Except in an emergency
making such procedure impracticable, the governing body of the
governmental unit shall authorize the contract in advance of its
performance by adopting a resolution setting out the essential
facts and determining that the contract price is as low as or lower
than the price at which the commodity or services could be obtained
elsewhere. In case of an emergency when the contract cannot be
authorized in advance, payment of the claims shall be authorized by
a like resolution in which the facts of the emergency are also
stated.
Subd. 3. Claims, affidavits filed. Before such a claim is
paid, the interested officer shall file with the clerk of the
governing body an affidavit stating:
(a) The name of the officer and the office held by him;
(b) An itemization of the commodity or services furnished;
(c) The contract price;
(d) The reasonable value;
(e) The interest of the officer in the contract; and
(f) That to the best of his knowledge and belief the contract
price is as low as, or lower than, the price at which the
commodity or services could be obtained from other
sources.
Official guidelines are not yet published. We recommend, however, that the City
take steps to provide evidence of compliance in the public officials conflict of
interest area. To provide evidence, we recommend that a letter of representation be
received from all public officials stating that he /she has read the applicable statutes
and that no such conflicts exist (or that such conflicts be disclosed). We are
available to assist the City in this procedure.
City of Lino Lakes, Minnesota
Management Report, Page 41
Computer System
The City has been considering the purchase of a computer system for the past several
years. The need for automation is apparent in various phases of City operations. The
City has limited funds for this endeavor. Additionally, there is limited availability
of quality software for microcomputer systems for cities.
We recommend that the City carefully consider the available options prior to
purchasing a system. Additionally, internal controls and operating systems must be
thoroughly reviewed prior to the implementation.
The conversion from a service bureau to an in -house system requires revamping of
internal control procedures. A partial listing of areas to review is as follows:
• Input Controls. Including input authorization, changes to input data,
input error detection controls, etc.
• Process Controls. Including validation of data prior to processing,
error detection features of systems, periodic tests of system functions,
etc.
• Output Controls. Including test of output for accuracy, distribution of
output controls, retention of output system, etc.
• Program Controls. System to assure that existing programs are not
altered without authorization and that authorized program changes are
effected and that all programs (and changes thereto) are properly docu-
mented completely and accurately.
• System Security. To assure only authorized use of the system and to
safeguard data that would otherwise be lost through error (or disaster
such as fire).
• Development of user manuals.
• Scheduling of system's user priority.
• Segregation of duties.
The above areas should be addressed by the City to assure a successful implemen-
tation of the overall system. These features will better assure safeguarding of City
interests and the overall integrity of the system.
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City of Lino Lakes, Minnesota
Management Report, Page 42
Fund Management
Each fund of the City is designed to operate as a separate self - balancing set of
accounts. Cash deficits in one fund must have compensating balances in another fund to
avoid an overall cash deficit in the City.
The City of Lino Lakes currently incurs cash deficits throughout the year in a
number of funds. Compensating positive cash balances have thus far been provided by the
Parks and Playgrounds Fund and the Special Assessment Debt Service Funds (primarily the
Improvement Bonds of 1982 Fund).
The Parks and Playgrounds Fund had $111,000 of cash and investments at December 31,
1984. In the absence of a major City Council expenditure authorization, this cash
balance should remain available.
The Special Assessment Debt Service Funds had over $316,000 of cash and investments
at December 31, 1984. This cash balance, however, may not be available to the City in
the next few years for the following reasons:
• Debt payments are scheduled and cannot be delayed.
• The cash balance is committed to meet these debt payment at a rate of just under
$200,000 per year.
• Future revenue sources are not assured because of:
- cancelled property tax levies for the Improvement Bonds of 1982.
- poor special assessment collection rates (see page 29).
- assessments on property which was acquired by the City through tax for-
feiture proceedings.
The above factors indicate that the positive cash balance of the Special Assessment
Debt Service Funds may diminish over the next several years.
As stated earlier, the City has relied on positive cash balances to offset the cash
deficits incurred throughout the year in the operating funds of the City. The General
Fund incurs cash overdrafts in several months of the year because there is not an ade-
quate "cash flow" reserve to offset the timing difference in the receipt of major reve-
nues (see earlier section - General Fund).
City of Lino Lakes, Minnesota
Management Report, Page 43
The Water and Sewer Fund continues to maintain cash overdrafts. Rates are currently
not adequate to cover the expenses incurred in that fund.
In addition to the operating funds, the City has incurred cash overdrafts in two
grant funded Capital Project Funds (i.e., CDBG and LAWCON - see earlier sections of this
report). These overdrafts are anticipated to be funded by future grant proceeds and /or
other City participation.
Three Special Assessment Debt Service Funds have cash overdrafts at December 31,
1984. Over $33,000 of these overdrafts are the result of expending project monies prior
to bonding. Additionally, the City has not remitted over $24,000 of SAC charges which
are due and payable to the MWCC.
The various funds which incur cash overdrafts are cause for concern and action by
the City Council. Effectively, the City is utilizing the concept of "using Peter to pay
Paul ". This cannot continue for an indefinite period. Potential reductions in State
and Federal aid could severely curtail the City's ability to provide minimum levels of
basic services.
This situation is probably manageable, if the City takes timely action to respond to
the current situation. In response to the current adverse financial position of various
funds, the City should increase efforts to respond to the ever changing financial mana-
gement environment. Future actions and efforts should include:
• A plan of action to develop adequate and appropriate reserve balances in the
governmental funds and enterprise funds of the City.
• Cash -flow projections, review, analysis and interpretations related thereto for
all (general, revenue and special assessment) bond issues of the City.
• Re- evaluation of all programs and services provided by the City as to
appropriateness based upon the existing financial environment including a re-
evaluation of levels of services and the costs thereof.
• Continued improvements and enhancements to the financial accounting and
financial management systems of the City to provide the necessary data to enable
the City to plan and manage the financial operations of the City.
• Regular and ongoing meetings related solely to the financial management and
planning of the City.
City of Lino Lakes, Minnesota
Management Report, Page 44
We recommend that the City continue to address the adverse financial position of the
operating funds (and other funds) of the City to assure the continued financial
integrity of the City.
Summary
A summary of areas to be reviewed and /or monitored by the City of Lino Lakes is as
follows:
• Continue to monitor legislative actions which can affect the financing of City
government. (Page 1)
• Draw down the maximum amount available MSA funds as qualifying projects are
approved. (Page 7)
• Continue efforts to monitor the property tax collection rates. (Page 8)
• Continue efforts to monitor special assessment collection rates and provide
supplemental financing if collections are not adequate to finance bonded debt
payments. (Pages 9 and 10)
• Review and improve internal control procedures over special assessments. (Pages
10 and 11)
• Review the benefits of implementing a fixed asset system.
• Continue efforts to improve the fund balance of the City's General Fund and
determine minimum required reserve levels. (Pages 13 - 17)
• Continue to review revenue sharing requirements and internal procedures to
comply with all applicable federal regulations. (Pages 17 and 18)
• Prepare and maintain a subsidary listing of all designated monies for the City's
Parks and Playground Fund. (Page 19)
• Take action to close the 1981 Certificates of Indebtedness Capital Project Fund.
(Pages 19 and 20)
• Take action to amend the 1985 budget and transfer an adequate amount to close
the City Hall Expansion Fund upon project completion. (Page 22)
• Take action to annually fund the City's share of expenditures of the Lawcon
Grant Fund. (Pages 22 and 23)
• Monitor the financial position of the City's Special Assessment Debt Service
Funds. (Pages 23 - 27)
City of Lino Lakes, Minnesota
Management Report, Page 45
• Review the status of the Lakes Addition #7 Fund and to take action to eliminate
the accumulated cash deficit. (Page 27)
• Take action to eliminate the liabilities in the Baldwin Lake Mobile Home Court
Fund and also authorize the closing of this fund to the related Debt Service
Fund. (Pages 27 and 28)
• Consider the adverse effects of completing construction projects prior to deter-
mining financing sources. (Page 28)
• Consider the use of an Interim Construction Fund. (Pages 28 and 29)
• Amend the City policy regarding administrative charges to Special Assessment
Funds. (Pages 29 and 30)
• Continue efforts to set utility user rates at self sustaining levels. (Pages 30
- 32)
• Take action to close the Minnesota Housing Revenue Bonds Fund. (Page 33)
• Review options available to the City regarding the Lino Lakes Gas Franchise
agreements. (Pages 34 and 35)
• Review internal control operating procedures regarding predating of checks and
recording of investment transactions. (Pages 36 and 37)
• Establish compliance procedures regarding public officials' compliance with
Minnesota Statutes 471.87 -89. (Pages 37 - 40)
• Establish a plan to evaluate internal data processing alternatives. (Page 41)
• Continue to review the overall financial position of the City's operating and
other funds to assure the financial integrity of the City. (Page 42 - 44)
Respectfully submitted,
g4g,./444g6fIg4,14A
VOTO, REARDON, TAUTGES & CO., LTD.
Certified Public Accountants
April 11, 1985