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HomeMy WebLinkAboutManagement Report and Recommendations 12/31/1983CITY OF LINO LAKES, MINNESOTA MANAGEMENT REPORT AND RECOMMENDATIONS DECEMBER 31, 1983 VOTO, REARDON, TAUTGES & CO., LTD. CERTIFIED PUBLIC ACCOUNTANTS Birch Lake Professional Building • 1310 E. Hwy. 96 • White Bear Lake, MN 55110 • Phone 426 -3263 ROBERT J. VOTO, CPA TIMOTHY E. REARDON, CPA ROBERT G. TAUTGES, CPA To the Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota We have completed our examination of your 1983 Annual Financial Report and have issued our audit report thereon. In conjunction with that examination, we present this Management report on matters relating to the 1983 financial opera- tions of the City. We offer this report as an additional analytical perspective for both the City Council and City Administration in managing the financial position and operations of the various accounts and funds of the City. We have also included our recommendations for improvements or enhancements to the finan- cial management system of the City. A summary of our recommendations is pre- sented on the last page of the report. FINANCING LOCAL GOVERNMENT IN THE 1980's Over the past several years, we have analyzed trends in the financing of local government in Minnesota and how these trends are changing. The changes now taking place are substantial. The financing of Minnesota local government in the 1980's will be substantially different from that of the 1970's. These changes must be addressed by those charged with the responsibility for City operations. An update of our prior reports "Financing Local Government in the 80's" is in process and will be completed pending the conclusion of the 1984 Legislature Session of the State of Minnesota. We will remit (under separate cover) this updated report to the City Council upon completion. 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 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 General Fund and a Special expenditures that are common to cities. The City maintains a Revenue Fund (Revenue Sharing). Financial reporting stan- dards in effect allow a city to reasonably prior year or other similar cities. compare its financial operations with its Total revenue for these funds for 1983 and 1982 were $930,753 and $772,878 as follows: Local taxes Special assessments Licenses and permits Intergovernmental revenue: State Federal Local Charges for services Court fines Interest on investments Other Totals 1983 1983 Amount Percent $ 355,684 38.21% 75,096 8.07 349,076 30, 575 80, 697 24,263 1,771 1 3, 591 37.50 3.29 8.67 2.61 .19 1.46 1982 Amount $ 305,804 18,142 51,604 283,089 42, 206 2,825 48, 764 10,935 3,917 5,592 Percent 39.57% 2.35 6.68 36.63 5.46 .36 6.31 1.41 .51 .72 $ 930,753 100.00% $ 772,878 100.00% 1982 Licenses &Permits Licenses &Permits Charges for Sera. Charges for Serv. Federal City of Lino Lakes Management Report, Page 3 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 pro- perty taxes reduce the amount available for expenditure during the current operating cycle. For 1982, the State of Minnesota contributed to the delinquency of property taxes levied through a reduction of the State paid homestead credit (after the reduction owners property tax bills). There is speculation that this type II of individual property p p y ) P YP of delinquency may occur in future periods as the State looks to solve other funding shortfalls. For 1984, the City of Lino Lakes took action to improve the property tax base for future years. The property tax levy for 1984 was not under statutory limitation. Future property tax levies may be under such limitations based on current legislation for cities with a population over 5,000. We concur with the action taken which should improve the overall financial position of the City and may assure greater financial independence in future periods. Since 1979, State aids and local property taxes used to finance the General Fund of the City of Lino Lakes were as follows: State Aids Property Taxes Year Amount Percent Amount Percent 1979 $184,184 35.05% $166,149 31.62% 1980 239,622 39.57 171,440 28.32 1981 300,971 41.92 212,914 29.78 1982 283,089 36.63 305,804 39.57 1983 349,076 37.50 355,684 38.21 City of Lino Lakes Management Report, Page.4 The above total State aids consist of the following amounts: State Aids 1979 1980 1981 1982 1983 Local Government Aid $127,963 $146,504 $157,862 $148,794 $171,011 Homestead Credits 43,450 78,792 112,911 111,829 139,767 Police Aid 10,158 11,296 12,188 14,326 14,245 MSA - Streets 8,080 -0- 13,110 Other Aids 2,613 3,030 9,930 8,140 10,943 $184,184 $239,622 $300,971 $283,089 $349,076 Percent change 30.10% 25.60% (5.94 %) 23.31% 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 IIthe 1982 allocation before State aid cuts due to the State budget situation. City of Lino Lakes Management Report, Page 5 Total expenditures for these follows: Current: General government Public safety Highways and streets Parks Other Capital outlay Totals funds for 1983 and 1982 1983 Amount Percent $ 220,144 366,917 219,429 42,019 5,597 9,646 $ 863,752 25.49% 42.49 25.40 4.86 .64 1.12 100.00% were $863,752 and $789,610, as 1982 Amount Percent $ 220,175 332,920 189,546 36,005 3,672 7,292 27.88% 42.16 24.01 4.56 .47 .92 $ 789,610 100.00% A graphic illustration of the above 1983 and 1982 expenditures is as follows: 1983 Details of the above expenditure the Annual Financial Report. 1982 categories are presented in Statements 7 and 9 of 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 City of Lino Lakes Management Report, Page 6 Combined Financial Statements The Combined Financial Statements of the City are presented in Statements 1 through 5 of the 1983 Annual Financial Report. The following comments relate to those state- ments. Cash and Investments Cash and Investments held by the City at December 31, 1983 totaled $581,790 as com- pared to 1982 balance of $409,561. These balances were deposited in various accounts and investments are summarized below: December 31, Increase Description 1983 1982 (Decrease) Treasurer's balance - checking $ 3,219 $ 1,092 $ 2,127 Petty cash 150 150 Investments: Certificate of deposits 400,000 200,000 200,000 Small Business Administration (SBA) 100,630 100,630 Savings account 15 116,154 (116,139) NOW account 77,776 92,165 (14,389) Totals $581,790 $409,561 $172,229 The City in 1983 had interest earnings on investments of $33,226 as compared to 1982 earnings of $61,921. The decrease in interest earnings was directly effected by decreasing interest rates available. In 1983, rates ranged from 9.25% to 8% and in 1982 ranged from 15.25% to 8 %. Additionally, the average cash available to invest throughout 1983 was less than the prior year. During 1983 and 1982, the City maintained an average negative balance of approxima- tely $27,000 and $1,400 respectively in the City's checking account. These negative balances are "book" balances only. These balances indicate that the City is depositing cash 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. City of Lino Lakes Management Report, Page .7 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, 1983 with one exception. The Bank of Minneapolis & Trust Company did not provide collateral sufficient to equal 110% of unin- sured deposits. We recommend that corrective action be taken and that the City review internal procedures to assure continuing compliance with statutory collateral require- ments. 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, 1983. The following schedule details these amounts. Description December 31, 1983 1982 State: Fines and forfeits $ 3,107 MSA 13,110 LAWCON $ 603 Federal: Community Development Block Grant 43,387 5,316 Federal Revenue Sharing 8,626 7,363 LAWCON 2,940 634 Local: Met Council - Planning Grant 2,825 MWCC - SAC Refund 425 MWCC - Maintenance Agreement 3,765 8,300 Final cost allocation 911 1,144 City of Centerville - Building Inspector Contract 10,447 Total $ 86,293 $ 26,610 For the current year's financial statements, the City recognized $13,110 of MSA maintenance aid which was received in January, 1984 for the prior year. Additionally, there is a "construction" balance available at December 31, 1983 of $56,753. This City of Lino Lakes Management Report, Page 8 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 completed. 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 MWCC Maintenance Agreement amount receivable represents the second half por- tion of the 1983 agreement. The prior year amounts represents the full (estimated) amount of the 1982 agreement. The MWCC did not honor the reimbursement requests ori- ginally submitted for 1982. The City adjusted the reimbursement data according to the MWCC request and subsequently received full reimbursement for 1982, and the first half of 1983. We commend the City for taking this corrective action and recommend that the City continue efforts to receive future reimbursements on a timely basis. Taxes Receivable Delinquent taxes receivable were as follows for 1983 and 1982: 1983 Delinquent balance - January 1 $ 81,671 Current levy Total receivable 587,845 669,516 1982 $ 44,254 544,842 589,096 Receipts: County: Current 380,063 332,566 Delinquent 34,223 23,750 State 170,627 139,283 Total receipts 584,913 495,599 Unadjusted balance Homestead credit loss 84,603 93,497 11,826 Delinquent balance $ 84,603 $ 81,671 Total collections as a percent of current levy 99% 91% City of Lino Lakes Management Report, Page 9 In 1983 the collection rate as a percent of current levy increased by 8% to a 99% rate. This increase in collection rate reverses a trend that the City had been experiencing for the prior four 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. Special Assessments Receivable Special assessments receivable consisted of the following: Delinquent Deferred Tax forfeit City property Delinquent - not spread for collection Total December 1983 $ 123,970 $ 746,489 18,373 122,524 8,446 31, Increase 1982 (Decrease) 31,780 $ 92,190 809,668 (63,179) 132,981 (114,608) 11,569 110,955 4,708 $1,019,802 $ 990,706 3,738 $ 29,096 1 1 1 1 1 1 1 1 Delinquent assessments consist of amounts which were spread for collection in 1983 II and prior years which have not yet been received. For 1983 and 1982, the City's special II assessment collections were as follows: Delinquent balance - January 1 Add: Current installment Amount collectible Less: Current collections Delinquent collections Total collections Adjustments Delinquent balance - December 31 Total collection as a percent of current levy 1983 1982 $ 31,780 $ 16,356 227,230 215,629 259,010 231,985 123,535 6,578 130,113 (4,927) $123,970 57% 185,968 14,237 200,205 -0- $ 31,780 93% 1 ��I 1 1 1 1 City of Lino Lakes Management Report, Page 10 As the above schedule shows, delinquent special assessments have increased substan- tially over the past year. 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 collection 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 maturities on a timely basis. We recommend that the City monitor the collection rate and provide supplemental financing if assessment collections are not adequate to meet bonded debt payments. The amount listed as "City property" totaled $122,524 at December 31, 1983. This amount has increased during 1983 as the City acquired additional properties which had gone tax forfeit in previous years, with assessments still remaining. 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 now intends to sell the properties and recover the related assessments. We recommend that the City determine if the amounts are fully recoverable and that interim financing continue to be provided through scheduled property taxes. When property is acquired with assessments receivable outstanding, the City should take action to pay or abate the assessments thereon. The decision to abate assessments should be made after reviewing the projected financial position of the related debt ser- vice fund. If the non - collection of these assessments has a material adverse effect on that fund's ability to make debt payments, then the City should take action to provide replacement financing. The amount of tax forfeit assessments receivable was $18,373 at December 31, 1983. These assessments are not currently being spread for collection. City of Lino Lakes Management Report, Page 11 There are two parcels on an assessment roll which appear on City records as being collectible in 1982 and 1983. The County, however, had not spread the amounts related to these two parcels for 1982. For 1983, the County has spread both the 1982 and 1983 portions for one of the parcels. The remaining parcel is currently being researched by the City to determine if the assessments due in 1983 and 1984 have been recorded. We concur with the City's efforts to determine the remaining balance on this parcel and recommend that the City determine the reason for this type of omission to avoid re- occurances. 1 1 1 1 1 �1 The City effects special assessment collections through Anoka County as a collection II 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 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 following improvements should be con- sidered: 1. Maintenance of delinquent assessment records by parcel and fund. This listing can be updated for receipts and adjustments as they occur. Each year this listing should be compared to County records. Any differences should be reconciled and appropriate adjustments made. 2. Maintenance of deferred assessment receivable listings. These listings should be updated for prepayments, current portions spread for collection and adjustments such as tax forfeitures. Each year the County spreads a current collectible portion, the City should compare those parcels spread with those on its internal records. 3. Maintenance of accounting records for any specially deferred type assessments including tax forfeit assessments. This information should also be compared to County records. 1 1 1 1 1 1 1 1 1 1 1 City of Lino Lakes Management Report, Page 12 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 over $1,000,000 at December 31, 1983. Due From (To) Other Funds The amounts recorded as due from (to) other funds were the result tion of receipts and disbursements and various other following schedule reflects these amounts. Fund # 101 303 509 560 Description General Fund 1981 Certificates of Indebtedness 1982 G.O. Improvement Bonds Baldwin Lake Mobile Home Court Total interfund of reclassifica- transactions. The Due From Due To Other Funds Other Funds $ 246.50 $ 9,688.58 263.28 9,425.30 246.50 $ 9,935.08 $ 9,935.08 Council authorization is required to transfer these interfund amounts. We recommend that the City record the cash transfers upon City Council authorization during 1984. 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. City of Lino Lakes Management Report, Page 13 Bonds Payable Balance - January 1, 1983 1983 Bond Issues 1983 Bonds Retired Balance - December 31, 1983 Bonds Payable Special General Assessments Debt $ 986,600 $ 55,700 Totals $ 1,042,300 100,000 100,000 51,320 55,700 107,020 $ 1,035,280 $ -0- $ 1,035,280 The bonds mature in 1983 through 1993. In 1983, the City sold the $100,000 G.O. Bond of 1983 to finance the Baldwin Lake Mobile Home Park Sewer Improvements. Scheduled bonded debt payments for all bonds including interest for 1984 is approximately $195,000. Detail of outstanding bond issues are contained in Exhibit 1 of the 1983 Annual Financial Report. A recent change in Federal legislation requires that municipal bonds be registered. Registration can be effected by a variety of methods depending upon the nature of the debt instrument. The objective of any system is to maintain a record of ownership. Any sale or transfer of ownership requires action by the named "registrar" to update ownership records. The City has issued the $100,000 General Obligation Improvement Bonds of 1983. The City has named itself as the registrar of record for this issue. As registrar (and paying agent), the City increases its responsibility for administration of the debt. The 1983 issue is a relatively small issue and consists of twenty bonds ($5,000 denominations). Additionally, the bondholder is a local bank. As such, the sales or transfers of the bonds is less likely and therefore the City may not be required to effect numerous transfer documents. Larger issues, however, may be designed to include an increased number of bonds and therefore a greater likelihood of periodic transfers. The cost /benefit factor of naming a third party registrar (versus assuming this respon- sibility internally) for larger issues should be carefully considered for any future (larger) bond issues. City of Lino Lakes Management Report, Page 14 Fund Equity Fund Fund Balance: General Fund Special Revenue Fund: Revenue Sharing Debt Service: 1980 Certificates of 1981 Certificates of Capital Projects: Parks and Playgrounds 1981 Certificates of Community Development LAWCON Grant City Hall Expansion Special Assessment: Improvement Bonds of Improvement Bonds of Improvement Bonds of Improvement Bonds of Improvement Bonds of Lakes Addition #7 Baldwin Lake Mobile H Totals Retained Earnings: Sewer and Water Fund Grand Totals Indebtedness Indebtedness Indebtedness Block Grant 1977 1980 1981 1982 1983 ome Court Fund Position (Deficit) December 31, 1983 1982 $ 131,116 11,768 -0- 2,361 105,457 15,998 1,992 (1,474) (51,135) 12,765 48,390 13,457 207,976 8,977 (22,584) 9,344 494,408 6,927 $ 501,335 $ 59,821 16,062 465 (5,448) 103,349 63,868 - 0- - 0- - 0- 11,736 44, 128 9,070 141,467 (22,584) 421,934 7,087 $ 429,021 Increase (Decrease) $ 71,295 (4,294) (465) 7,809 2,108 (47,870) 1,992 (1,474) (51,135) 1,029 4,262 4,387 66,509 8,977 9,344 72,474 (160) $ 72,314 The following section of this report relates to the various changes in the fund positions. City of Lino Lakes Management Report, Page 15 General Fund The financial statements for the General Fund . are presented in Statement 6 and 7 of the 1983 Annual Financial Report. The fund balance of the General Fund was $131,116 at II December 31, 1983 representing a $71,295 increase in fund balance during 1983 as result of the following: 1 Actual revenues over (under) budgeted revenues: Tax collections Licenses and permits Intergovernmental revenue Charges for services Court fines Miscellaneous Net revenue under budget Actual expenditures over (under) budgeted expenditures: General government Public safety Highways and streets Parks Net expenditures over budget Actual transfers over budgeted transfers Total improvement 15,700 9,300 8,200 10,600 24,300 (1,400) 5,000 (12,200) 9,500 300 1 1 66,700 ' 2,600 7,200 $ 71,300 Statement 7 of the 1983 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) Year Ended December 31, Designated 1978 $ 11,464 1979 14,655 1980 18,766 1981 19,876 1982 46,466 1983 51,084 Increase (Decrease) in Undesignated Undesignated $ 51,249 50,652 $ (597) (19,730) (70,382) 30,109 49,839 13,355 (16,754) 80,032 66,677 1 1 1 1 1 1 1 1 1 1 1 City of Lino Lakes Management Report, Page 16 The amounts presented for all years in the above schedule as "designated" consist of prepaid insurance and amounts designated for road improvements (1981 and prior). Prepaid insurance is not available for other expendable purposes and therefore is designated for ensuing years expenditures. The amount designated at December 31, 1983 and 1982 also includes a $30,000 designa- tion for the City matching share of the LAWCON Grant. This amount was levied for collection in 1982 under special levy authority. As such it is not available for general City purposes, but rather is designated for transfers to the LAWCON Fund for the City's share of the Country Lakes Park project. Temporary cash overdrafts of certain funds must have offsetting cash balances in other City funds to maintain an overall positive cash balance for a City. The General Fund should maintain adequate cash balances to maintain operations without experiencing cash overdrafts. The cash overdraft of the General Fund was in excess of $186,000 at June 30, 1983. For 1983, the General Fund had a positive cash balance only in the month of December. No local government aid will be available to the City until July for 1984 and the first half tax allocation will also not be available until July, 1984. The City improved the financial position and reserve balance of the General Fund substantially 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 reserves, these external factors are more mangeable by the City. City of Lino Lakes Management Report, Page 17 The prior Management Report to the City indicated that fund balance reserves in the City's General Fund are required for sound financial management of the City. A summary of reasons for maintaining General Fund reserves are as follows: 1. Cash flow requirements. The City receives two major funding sources after one -half of the calendar year has elapsed. Property taxes are primarily received in July and December. Major State aids (local government aid and homestead credits) are received in six monthly installments starting in July. The City does not have the ability to only incur expenditures in the second half of the calendar year. Most expenditures are incurred evenly throughout the year on salaries and other operating expenditures. The timing of major revenue does not therefore meet the needs of the City to fund expenditures from January through June. 2. Emergency and /or unanticipated expenditures. The diverse nature of a City's operations are such that unforeseen events require financial flexibility. Natural disasters, lawsuits, unexpected capital outlay requirements and preliminary funding for vital improvements must be financed on a current and timely basis. General Fund reserves allow the City to meet such costs and preserve the well being of its tax- payers. 3. Reduction in shared. intergovernmental aids. At the present time, the State is involved in a budget crisis and the Federal government is involved in a tax reduction program. Although the effects of these situations are constantly changing, it appears likely that past trends of increasing aids to cities (by both State and Federal governments) will not continue. It appears likely that this trend will be reversed with a larger portion of the cost of City government being financed by revenue raised locally rather than at the State or Federal levels. The City's ability to convert to greater self reliance will be enhanced through the maintenance of adequate General Fund reserves. 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 II established by the City based on the history of the City and the philosophy of "adequate" reserve coverage. 1 1 1 1 1 1 1 1 1 1 1 1 1 The reserve requirement to deal with unforeseen intergovernmental revenue reductions II 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 1 1 1 City of Lino Lakes Management Report, Page 18 changing legislation and budget such aids accordingly. A reserve "cushion" in the City's General Fund will mitigate the adverse effects of aid reductions which are received after expenditure budget commitments are made. The minimum cash flow reserve requirement is measurable. For the City of Lino Lakes, the minimum required reserve is $438,000 computed as follows: 1983/84 Budgeted Levy (Includes Homestead Credit) 1983/84 Anticipated Local Government Aid Total $ 690,000 185,196 $ 875,196 Minimum Required Cash -Flow Reserve (One -Half of Total) $ 438,000 The minimum required cash flow reserve of the City's General Fund is $438,000. The December 31, 1983 fund balance does not meet this requirement. The City was below its minimum required cash flow reserve by approximately $307,000. The City of Lino Lakes has improved its General Fund balance over the past year. We commend the City for this accomplishment, however, the City has not yet achieved the "required cash flow" reserve. This reserve has changed due to increased operating expenditures, changes in the timing of State aid payments and decreases in State aids provided. We recommend that the City continue to improve the fund balance of the City's General Fund and implement actions to achieve the minimum reserve requirement. The City should review General Fund reserve objectives and define what level of fund balance reserve is appropriate for the City of Lino Lakes. Once the amount is quantified, the City can maintain such reserves in future years through the use of unbalanced budgets (surplus versus deficit budgets). We recommend that the City address the issue of General Fund reserves and continue to take action to achieve and maintain the desired levels through formal Council action and /or policy statements. City of Lino Lakes Management Report, Page 19 Special Revenue Funds The financial statements of the Special Revenue Funds are presented in Statements 8 and 9 of the 1983 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 $11,768 at December 31, 1983 consists of the fourth quarter allotment receivable ($8,626) and accumulated interest earned over the past year. The City has appropriated the 1984 entitlement to be transferred to the City Hall Expansion Fund (Capital Project). The rules and regulations of the Office of Revenue Sharing are considerable (and are II subject to frequent change). Certain requirements deal with publications of notices. The City did meet all the publications requirements for 1983 with minor exceptions. We recommend that the City continue to publish all required notices and monitor the notices II 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 Deadline • Publish a statement that recipient does not January 17, 1984 descriminate against handicapped persons • Conduct a self evaluation October 17, 1984 • Make necessary nonstructural changes to October 17, 1984 achieve program accessibility • Prepare a transition plan where structural changes are necessary and make such structural changes within three years October 17, 1984 City of Lino Lakes Management Report, Page 20 The City should have received information on the above requirements from the Office of Revenue Sharing. We recommend that the City review the requirements in detail and establish procedures to comply with the various Federal regulations now being imposed. We are available to discuss the above changes. The new regulations also dropped the proposed use hearing and related publication. The City is now only required to hold a budget hearing on Revenue Sharing funds. The City for 1984 designated the Revenue Sharing monies to be used for the City Hall expansion. The City should have the ability to document Revenue Sharing expenditures with specific vouchers (or checks). The City should prepare a list of the Police Department expenditures funded by Revenue Sharing funds in 1983. We recommend that a record be established by the City which details all future expenditures funded with Revenue Sharing funds. The rules and regulations of Revenue Sharing also require periodic compliance audits. The City has complied with this regulation through filing of such audits for 1978 and 1981. The next required audit (under current guidelines) will be for 1984 (due in 1985). Debt Service Funds The combining financial statements of the City's Debt Service Funds are presented in Statements 10 and 11 of the 1983 Annual Financial Report. 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 1982 Certificates of Indebtedness. During 1983, the City retired this remaining issue. The 1980 Certificates of Indebtedness was closed by Council resolution in 1983 to the 1981 Certificates of Indebtedness. The 1980 Certificates were retired in 1982. City of Lino Lakes Management Report, Page 21 1 The 1981 Certificates of Indebtedness final bond payment was made in 1983. The City II has taken action to close this fund in 1984 to the Capital Project Fund (1981 Certifi- cates of Indebtedness). Capital Project Funds The financial statements for the City's Capital Project Funds are presented in Statements 12 and 13 of the 1983 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, 1983 and 1982 were: Fund Parks and Playground 1981 Certificates of Indebtedness Community Development Block Grant LAWCON Grant City Hall Expansion Totals December 31, 1983 1982 $ 105,457 $ 103,349 15,998 64,746 1,992 -0- (1,474) (878) (51,135) -0 $ 70,838 Increase (Decrease) $ 2,108 (48,748) 1,992 (596) (51,135) $ 167,217 $(96,379) Parks and Playground This fund was established to account for dedicated park fees. The fund balance of $105,457 at December 31, 1983 is available for expenditures by the City to fund capital ■ 1 1 1 1 1 1 1 1 1 outlay and maintenance of dedicated park lands. The City normally collects park dedication fees upon sub - division. 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 $11,316 at December 31, 1983. 1 1 1 1 1 1 City of Lino Lakes Management Report, Page 22 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 1983 and 1982: Over (Under) Description Budget Actual Budget Police Cars $ 22,000 $ 21,747 $ (253) 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 $ 108,349 $ (3,051) The City completed the purchase of all the above budgeted equipment during 1983. The following schedule summarizes the activity of this fund through December 31, 1983. Proceeds for issuance of certificates Interest earnings: 1981 1982 1983 $ 111,400 1,288 9,901 1,758 Total revenue provided $ 124,347 Expenditures: 1981 1982 1983 2,707 55,136 50,506 Total expenditures 108,349 Fund balance - December 31, 1983 $ 15,998 City of Lino Lakes Management Report, Page 23 The City has earmarked $13,000 of the residual balance of this fund to be used to finance a portion of the City Hall expansion. We recommend that the City Council take formal action to close this fund and approve a transfer of the remaining balance to the City Hall Expansion Fund which is accounting for the City Hall expansion project. 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 II Lakes is considered to be a sub - grantee and will have to comply with the provisions of the grant agreement. There are several instances of apparent non - compliance with Davis Bacon Act provisions by contractors involved with the Senior Citizens construction. This is one area of compliance involved with Federal CDBG programs. We recommend that the City determine the compliance procedures that will be required and document in City II records that they have complied. Proper documentation with the grant agreement will aid the City in receiving the monies applied for in reimbursement of City expenditures. The City has appropriated the 1982, 1983 and 1984 block grant funds for: • Construction of Senior Citizen facility. • Alexander House. The CDBG allotments for 1982 to 1984 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 29,000 32,000 Total $ 13,000 $155,502 $168,502 City of Lino Lakes Management Report, Page 24 The total amount needed to finance the Senior Citizen facility per the cost estimate . by the City was $126,502. The City has expanded the scope of the project to include kitchen facilities, parking, landscaping and lighting. We recommend that the City review the financing and related expenditures of the Senior Citizen center to assure that financing is sufficient. The following schedule summarizes the activity of this fund through December 31, 1 983: Revenue: County of Anoka Community Development Block Grant Expenditures: 1 982 1 983 $ 5,316 93, 375 Total expenditures Fund balance - December 31, 1983 Less: Designated for committed contracts Adjusted balance (deficit) $ 100,683 98,691 1,992 (33,580) $ (31,588) 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. We recommend that the City amend the 1984 General Fund budget to account for revenues and expenditures of the City Hall Expansion Project in the Capital Project Fund. City of Lino Lakes Management Report, Page 25 The City should maintain detail records of cost allocations to allow for segregation 1 of City versus CDBG reimbursable expenditures. We recommend that the City prepare /develop these detail records to maintain such accounting detail. Financing for the City Hall upgrading, at an estimated cost of $65,079, is budgeted to be provided from the following sources: 1981 Certificates of Indebtedness 1984 Budget Allocation Transfers from other funds Total original financing program $ 13,000 35,000 17,079 65,079 Additional Provided: 1984 Revenue Sharing 30,000 Total Financing Provided $ 95,079 Estimated Costs $ 65,079 1 1 1 1 1 The designation of Revenue Sharing monies for construction projects may cause the 1 City additional costs in the expending of Revenue Sharing allotment. The various federal requirements (primarily Davis Bacon Act regulations) may increase the construc- tion costs incurred. These regulations may cause undue administrative complexity in 1 monitoring compliance and in some cases it actually may increase the contract cost. Expending entitlements on contracts and /or numerous smaller expenditures, increases the 1 required level of documentation to comply with Revenue Sharing rules. An alternative approach is to use the entitlements on a major qualifying expenditure such as the fire protection contract. Providing supplemental financing for a service previously financed II in the General Fund allows the City to budget a somewhat corresponding transfer out (from the General Fund to a Capital Project Fund) to finance other improvements. The added benefit is that burdensome administrative procedures are avoided because the Revenue Sharing entitlements are technically used for fire protection. We recommend that the City consider alternate methods of expending Revenue Sharing entitlements. 1 We recommend that the City review this project to insure that costs are properly allocated and that financing is sufficient to fund all construction expenditures on a timely basis. 1 1 1 1 1 City of Lino Lakes Management Report, Page 26 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 Expenditures: Engineering Survey Total expenditures $ 2,792 2,941 3,545 9,824 928 9,278 10, 752 Fund balance (deficit) - December 31, 1983 (1,474) Less: Designated for committed contracts (93,000) Unappropriated fund balance (deficit) - December 31, 1983 $(94,474) The above fund deficit ($1,474) is the City share of expenditures to date. The total project funding is as follows: State $ 56,367 Federal 59,346 City 82,107 Total estimated project $ 197,820 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 of Lino Lakes Management Report, Page 27 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. Special Assessment Funds The financial statements of the Special Assessment Funds are presented in Statements 14 and 15 of the 1983 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. 1 1 1 1 1 1 1 1 1 1 1 financing primarily but can be realized 1 1 1 1 1 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 supplementa will consist of future tax levies (scheduled and /or unscheduled) through future interest on investments, permanent transfers -in an d /or other City Council designated sources. City of Lino Lakes Management Report, Page 28 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. Fund Scheduled Future Interest Projected Year of Position Future Add: Deduct: Fund Final Debt Service Fund 12/31/83 Tax Levies Assessments Bonds Position Maturity Improvement Bonds of 1977 $ 12,765 $ 3,100 $ 3,160 $ 12,705 1987 Improvement Bonds of 1980 48,390 22,300 19,800 50,890 1986 Improvement Bonds of 1981 13,457 21,500 19,312 15,645 1991 Improvement Bonds of 1982 207,976 $ 267,764 205,300 301,028 380,012 1991 Improvement Bonds of 1983 8,977 62,700 48,600 23,077 1993 Totals $ 291,565 $ 267,764 $ 314,900 $ 391,900 Total projected fund position 482,329 Less: Tax forfeit and City property assessments included in projections 131,101 Adjusted projected fund position 351,228 Statutory reserve (5% of unmatured bond requirements) 71,400 Excess projected fund position $ 279,828 The overall actual and projected fund positions of the Special Assessment Funds indicate that these bond funds are adequately financed at December 31, 1983. 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 $12,704 represents a $500 decrease during 1983. This decrease was a result of the following: Projected balance - January 1, 1983 $ 13,200 Change in future interest on assessments Interest on investments Special assessment adjustments (1,600) 1,600 (500) Projected balance - December 31, 1983 $ 12,700 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 Management Report, Page 29 Improvement Bonds of 1980 The projected fund position of $50,890 increased by $1,362 due primarily to interest earned on investments during 1983. Also, during 1982, this fund experienced a collection rate on current assessments of II 16 %. This amounted to a $48,000 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 is in a cash deficit of $23,800 at December 31, 1983. The City should also provide supplemental financing in the form of supplemental tax levies if determined to be necessary. 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 $122,500 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 $74,000 of delinquent assessments receivable. The fund experienced a 1983 collection rate on current assessments receivable of 64 %. The fund does have future scheduled tax levies of $267,764. The City, however, cancelled the 1983/84 levy of $36,244. The City should prepare projections on this fund to insure that adequate cash assets II will be available on a timely basis to meet bond principal and interest payments as they become due. City of Lino Lakes Management Report, Page 30 Special Assessment Debt Service Projections The City has special assessment bonds outstanding at December 31, 1983 which total $1,035,280. This is a major area of financial management of the City. Special Assessment Debt Service Funds are established by bond sale resolutions and must exist throughout the period in which bonds are outstanding. During that period, these funds collect revenues to pay the bond principal and interest in a timely manner. The primary source of revenue for these funds is special assessments to benefiting property owners. These assessments recover construction costs over the term of the assessment roll plus interest at specified rates. In addition to special assessment revenue, these funds commonly collect property taxes, interest on investments, and other designated revenues. Debt service payments are scheduled without variance. All revenue sources, however, are based on estimates at the date of the bond sale. In packaging a bond sale, the fiscal agent must attempt to predict the amount and timing of future assessment rolls. As circumstances change, the actual results may significantly alter the financial posi- tion of the debt service fund. Examples of changes to original estimates might be: • A decision of the City to not fully assess a project. • A decision by the City to defer special assessments for unusual circumstances. • Other deferrals of special assessments (senior citizens, 10 year, etc.) • The delinquency rate of special assessments. • The interest rate realized on available cash balances. • The timing of the adoption of the assessment roll. • City share of improvement costs. All of these factors and other factors will change the original projected outcome of each special assessment debt service fund. For these reasons, it is essential to re- evaluate the projected financial position of special assessment debt service funds. A procedure to evaluate this is through the preparation of a Special Assessment Debt Service Study. Our office has an electronic data processing program to expedite the process and at the same time present scenarios based on multiple variables (i.e., special. City of Lino Lakes Management Report, Page 31 assessment collection rates and investment earning rates). The use of such multiple variables allows the City to develop long -term plans for the maintenance of these accounts and the eventual use of any available reserves. Construction Funds Lakes Addition #7 Lakes Addition #7 has had the following transactions from inception: Miscellaneous Revenue Preliminary Construction Costs Fund balance (deficit) - December 31, 1983 1982 and Prior $ 183 1983 $ -0- $ 22,767 -0- Total $ 183 22,767 $ (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 r 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 was completed and assessed in 1983. The fund is carrying a liability to MWCC for sewer II availability charges of $24,400. We recommend that the City remit this money to MWCC in 1984 and close the fund to the related debt service account. The assessment roll of this fund was calculated on estimated costs which vary from actual results as follows: Construction contract Sewer availability charges Enginerring, legal, administrative and contingency Capitalized interest Total December 31, Estimated Actual Difference $ 45,179 $ 1,016 24,650 $ 46,195 24,650 21,155 8,000 $100,000 12,827 8,328 1,700(1) 6,300 $ 84,356 $ 15,644 (1) Calculated from date of bond sale to date of assessment roll adoption (September 28, 1983 to December 31, 1983). City of Lino Lakes Management Report, Page 32 The City assessed the estimated amount of $100,000. Interest accrues starting on the date of the assessment roll adoption. All costs of this project were not completed at December 31, 1983. We recommend, upon completion, that the City determine the final total costs and take action to close this 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 retirement 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 Management Report, Page 33 Enterprise Fund The Enterprise Fund of the City of Lino Lakes financial statements are presented in the 1983 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, 1983 1982 Amount Percent Amount Percent Operating Income: Water billings $ 5,421 15.03% $ 6,461 21.43% Sewer billings 27,763 77.02 23,688 78.57 Other 2,862 7.95 Total operating income 36,046 100.00 30,149 100.00 Operating Expenses: Personal services 11,477 31.84 15,050 49.92 MWCC 18,116 50.26 14,625 48.51 Repairs and maintenance 7,810 21.67 9,828 32.60 Depreciation 838 2.32 180 .60 Other 8,975 24.89 5,157 17.10 Total operating expenses 47,216. 130.98 44,840 148.73 Income (Loss) From Operations (11,170) (30.98%) (14,691) (48.73 %) Other Income /(Expenses): MWCC maintenance agreement 11,010 14,295 Utility rate study (1,995) Net Income /(Loss) $ (160) $. (2,391) The net loss of the Water and Sewer Utility fund decreased by $2,200 from 1982. The City reviewed and increased sewer utility rates in 1982, and in 1983 realized the increased rates for the entire year. The City should continue to review rates annually and make adjustments to the rates based on costs incurred and expected to be incurred. The City's water revenues increased in 1983 as a result of increased utility rates as adopted by the City Council. City of Lino Lakes Management Report, Page 34 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 1984 were as follows: Year 1977 1 978 1979 1980 1 981 1 982 1 983 1 984 Billings from MWCC Estimated Percent Amount Change 3,046 3,560 16.8% 8,312 133.5 6,858 (17.5) 11,357 65.6 15,504 36.5 19,027 22.7 26,107 37.2 Final Percent Amount Change $ 1,573 3,662 132.8% 6,171 68.5 7,123 15.4 10,213 43.4 14,592 42.9 Not available Not available 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 1984 over 1983 for the City of Lino Lakes is 28 %. 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 $761 to an estimated $815. This respre- sents an increase of 7 %. The combination of these factors increased the City's esti- mated cost in 1984 by nearly 37 %. 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 sub- sidized 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 767 per one thousand City of Lino Lakes Management Report, Page 35 gallons processed. The City is therefore charging customers less than the MWCC charges the City. This revenue /expense comparison relfects 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 1983 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. 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. a letter dated June 29, 1983, we summarized the conclusion of our limited review of the II 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 1982. Those amounts are as follows: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 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 Five Year Totals $162,573 71.4% $ 65,100 28.6% $227,673 100.0% City of Lino Lakes Management Report, Page 36 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 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 $224,000 while the Lino Lakes retained earnings account is in a deficit position. The City of Lino Lakes has certain rights with regard to the gas utility franchise agreement. One of those rights is a purchase option after twenty -five years. This option will be available within the next several years. 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. 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 City of Lino Lakes Management Report, Page 37 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 safeguarding of assets against loss from unauthorized use or disposition, and the reliability of financial records for pre- paring financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes 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 poten- tial effectiveness of any system of internal accounting control. In the performance of most control procedures, errors can result from misunderstanding of instructions, mis- takes 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 esti- mates and judgments required in the preparation 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 conditions 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 City of Lino Lakes Management Report, Page.38 of the City of Lino Lakes taken as a whole. However, our study and evaluation disclosed that a substantial portion of the accounting process is performed 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 modification 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, 1983 financial statements, and this report does not affect our report on the financial statements dated February 20, 1984. This report is intended solely for the use of the City of Lino Lakes and should not be used for any other purpose. Financial Management Requirements The City now employs a hand posted accounting system. The general ledger use is generally limited to cash and investment accounts. The effect of this is to maintain minimal general ledger control. In effect the City is operating the accounting system on a cash basis with accrual /modified accrual entries made on year -end audit workpapers. The third party Annual Financial Reports of the City are, however, issued on the generally accepted accrual /modified accrual basis. This difference between the internal and external basis of accounting causes undue complexity in the year -end closing process and limits the effectiveness of the overall system of accounting and reporting. Certain financial information is readily available only at the date of issuance of the Annual Financial Report. In the past, the need for timely financial data regarding the financial position of the various funds of Cities was not always urgent. The City of Lino Lakes Management Report, Page 39 current economic environment and the State budget crisis increases the need for timely financial data in the management of Minnesota Cities. We feel that full implementation of the financial accounting system should be made a priority of the City. Full implementation should include: • Obtaining capability (in -house computer system or service bureau system) which will provide electronic data processing for accounting records on the accrual /modified accrual basis in accordance with Minimum Reporting Standards for Minnesota Cities. • Obtaining word processing capabilities for improved efficiency in completing resolutions, minutes, correspondence, scheduling and many other applications. • Full general ledger accounting controls over all assets, liabilities and equity accounts in addition to revenue and expenditures. • Gradual conversion from the cash mode to the accrual /modified accrual mode with complete conversion projected. • Greater utilization of City personnel (rather than outside consultants) to perform the annual year -end closing process. • Periodic cash flow projections of all debt service funds to the final maturity of each bond issue and annual cash flow projections on all City funds to assist in investment strategies. • Implementation of internal audit techniques and procedures to timely assure the accuracy and propriety of recorded transactions and, there - fore, internal financial reporting. • Implementation of internal periodic review procedures (along with internal audit procedures) to assure that the City's internal financial accounting system responds to changing situations on a timely basis and continues to be a viable tool by which to manage the financial opera - tions of the City. • Review of Special Assessment - Construction and Debt Files to assure that the City's financial management system over construction and debt financing is adequate and to give the City the ability to properly and timely monitor and analyze the current status of its construction pro- jects. City of Lino Lakes Management Report, Page 40 The accomplishment of the above tasks will provide both immediate and future bene- fits to the City. These benefits include: • Reduction of third party (consultant) fees in the performance of the year -end closing process and City reliance upon third parties for accurate and timely information. • Greater control over financial records of the City. • Greater and more timely access to current financial data. The main benefit to the City of Lino Lakes will be a tremendous increase in the internal financial management abilities and the timeliness of the City's financial information. The City's financial accounting system is not meant only to serve the City's auditors at year -end. It is meant, primarily, to serve the City Council and City Administration on a daily, weekly, or monthly basis. This can only be of benefit if the City maintains financial accounting controls and financial information by its own per- sonnel and on a timely basis. The preceding section of this report was designed to inform the City of financial environment changes to which the City has and must continue to address. The City has been reviewing alternate data processing. Our office is available to assist the City in evaluating and implementing alternate accounting systems. City Purchasing Procedures The Minnesota Municipal Contracting Law (section 471.345) establishes purchasing parameters as follows: 471.345 UNIFORM MUNICIPAL CONTRACTING LAW (Excerpts) Subd. 2. Contract defined. A "contract" means an agreement entered into by a municipality for the sale or purchase of supplies, materials, equipment or the rental thereof, or the construction, alteration, repair or maintenance of real or personal property. 1 City of Lino Lakes Management Report, Page 41 Subd. 3. Contracts over $15,000. If the amount of the contract is estimated to exceed $15,000, sealed bids shall be solicited by public notice in the manner and subject to the requirements of the law governing contracts by the particular municipality or class thereof provided that with regard to repairs and maintenance of ditches, bids shall not be required if the estimated amount of the contract does not exceed the amount specified in section 106.571, subdivision 2. Subd. 4. Contracts from $10,000 to $15,000. If the amount of the contract is estimated to exceed $10,000 but not to exceed $15,000, the contract may be made either upon sealed bids or by direct negotiation, by obtaining two or more quotations for the purchase or sale when possible, and without advertising for bids or otherwise complying with the requirements of competitive bidding. All quotations obtained shall be kept on file for a period of at least one year after receipt thereof. Subd. 5. Contracts less than $10,000. If the amount of the contract is estimated to be $10,000 or less, the contract may be made either upon quotation or in the open market, in the discretion of the governing body; but shall be based on at least two quotations which shall be kept on file for a period of at least one year after receipt thereof. An apparent oversight in the text of this law does not set a minimum required contract. Subdivision 5 includes "contracts less than $10,000 ". A "contract" includes an agreement to purchase supplies and materials. Strict interpretation of this statute may require retention of two quotations on virtually all supply and material purchases of the City. There is pending legislation to correct this apparent oversight in the 1984 legislative session. We recommend that the City be aware of compliance parameters and correspondingly review purchase procedures of the City to assure such compliance. City of Lino Lakes Management Report, Page 42 SummarZ A summary of areas to be reviewed and or monitored by the City of Lino Lakes is as follows: • Monitor State legislative actions which effect the revenues available to the City. (Page 1) • Review procedures to assure compliance with MS 118 which establishes deposit collateral requirements. (Page 7) • Continue efforts to monitor 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 - 10) • Review and improve internal control procedures over special assessment and establish policy with regard to properties acquired by the City. (Pages 10 - 12) • Review benefits of implementing a fixed asset system. (Page 12) • Continue efforts to improve the fund balance of the City's General Fund and determine minimum required reserve levels. (Pages 15 - 18) • Review amended Revenue Sharing regulations and take action to assure compliance. (Pages 19, 20) • Retain subsidiary listings of all Parks and Playground Fund designations. (Pages 21, 22) • Determine sub - grantee compliance procedures required with regard to the Federal CDBG program. (Pages 23, 24) • Monitor financial position of the Community Development Block Grant Fund and the City Hall Expansion Fund to assure full and timely financing. (Page 24) • Amend the General Fund budget for 1984 to report expenditures of the City Hall Expansion in the Capital Project Fund. (Page 24) • Monitor financial position of the LAWCON Grant to assure full and timely financing. (Page 26) • Monitor the projected financial position of the City's Special Assessment Debt Service Fund. (Pages 27 - 30) City of Lino Lakes Management Report, Page 43 • Amend City policy with regard to Administrative Construction charges. (Page 32) • Continue efforts to set utility user rates at self - sustaining levels. (Pages 33 - 35) • Establish plan to evaluate internal data processing alternatives. (Pages 38 - 40) • Review City purchasing procedures for compliance with the Uniform Municipal Contracting Law. (Pages 40, 41) Respectfully submitted, VOTO, REARDON, TAUTGES & CO., LTD. Certified Public Accountants May 4, 1984