HomeMy WebLinkAboutManagement Report and Recommendations 12/31/1982CITY OF LINO LAKES, MINNESOTA
MANAGEMENT REPORT AND RECOMMENDATIONS
DECEMBER 31, 1982
DELAHUNT VOTO & CO., LTD.
CERTIFIED PUBLIC ACCOUNTANTS
Birch Lake Professional Building s 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
RONALD J. DELAHUNT, RETIRED
ROBERT J. VOTO, CPA
TIMOTHY E. REARDON, CPA
ROBERT G. TAUTGES, CPA
We have completed our examination of your 1982 Annual Financial Report and
have issued our audit report thereon. In conjunction with that examination and
in accordance with our Agreement for Auditing /Accounting Services, we present
this Management Report on matters relating to the 1982 financial operations 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 financial management
system of the City. A summary of our recommendations is presented on the last
page of the report.
Financing Minnesota Local Government in the 80's
(Update - April, 1983)
The most significant events affecting the future financial management of the
City of Lino Lakes and all Minnesota local government units continue to occur at
the State level rather than at the local level. These events (collectively
referred to as the State budget or cash -flow situation) have been affecting
Minnesota local government units since August, 1980 and will continue to affect
all Minnesota local government units until the State budget situation is effec-
tively and conclusively resolved.
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
IIManagement Report, Page 2
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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. This Report has been prepared
to identify major changes and to communicate this information to City Councils and
Administrators to assist in the future financial management and planning of the City.
Minnesota cities (general government operations) are financed by two primary revenue
IIsources. These are State aids and local property taxes. State aids paid to Minnesota
cities can be classified under two primary categories: (1) tax -levy related aids; and,
(2) local government aid (i.e. per capita aid).
State tax -levy related aids (primarily homestead credits) are aids to individual
property owners rather than aids to cities. City Councils certify the City tax levy
Ieach October. Once certified, the County Auditor tabulates that portion which is to be
paid by the State (i.e. homestead credits and other tax -levy related credits) and the
remaining balance which is to be paid by property owners. These tax -levy related State
IIaids (deducted from certified tax levies) do not increase or decrease the amount of
revenue a City will receive. They only pro -rate the certified tax levies between the
IIState and property owners. Accordingly, when a City Council adopts its annual operating
budget, it will generally estimate one amount for local property taxes which includes
the tax -levy related State aids.
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The second primary revenue source for financing the general government operations of
a Minnesota city is local government State aid. This aid is paid to Minnesota cities in
addition to the tax -levy related State aids. Local government aid does represent addi-
tional revenue to Minnesota cities. Certified property tax levies and local government
aid generally represent the majority of revenue available to finance the general govern-
ment operations of a Minnesota city. More important, these revenues are controlled ed by
IIState Statutes and are subject to the ability of the State to meet these commitments.
City of Lino Lakes
Management Report, Page 3
During the 1970's, the State introduced levy limitations for local property taxes
and increases in State aids to local government units in an effort to limit
the local
property tax burden in this State. This State policy became effective with the payable
1972 property taxes. The effect of this State policy was to limit property tax
increases, as follows:
1. Percent increases (1981 over 1971):
A. Total property taxes levied by all
Minnesota Local Government Units
83% Increase
B. Total State property tax credits paid
to local government units. 317% Increase
C. Property taxes paid by property owners. 50% Increase
2. Percent increase in the Consumer Price
Index (C.P.I. -U, Minneapolis - St. Paul
Area) October, 1971 to October, 1981
136% Increase
As illustrated above, the State policy of the 1970's did indeed limit local property
tax increases in the State of Minnesota. This was the direct result of local levy limi- 1
tations and increases in State aids paid to local government units by the State.
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The preceding data reflects property taxes and related State aids from 1971 to 1981.
The trend of limited local property taxes was reversed in 1982. The following schedule II .
reflects a one year change of 24 %, as follows:
STATE -WIDE TOTALS
School Districts
Counties
Cities
Fiscal Disparities
Tax Increments
Townships
Special Districts
Total Taxes Levied
State Credits Deducted from
Taxes Levied:
Homestead Credits
Agricultural Credits
Other Credits
Total State Credits
($1,000 of Dollars)
1981 1982 CHANGE
$ 850,256
549,366
343,049
46,775
22,489
41,173
51,030
1,904,138
447,233
70,457
13,927
531,617
Net Taxes Paid By Property
Owners $ 1,372,521
$ 1,099,683
617,565
381,904
65,020
35,141
46,707
59,062
2,305,082
495,706
86,946
17,063
599,715
$ 249,427
68,199
38,855
18,245
12,652
5,534
8,032
400,944
48,473
16,489
3,136
68,098
$ 1,705,367 $ 332,846
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CHANGE
29.34% II
12.41% II
11.33%
39.01%
56.26%
13.44%
15.74%
21.06% II
10.84% II
23.40%
22.52% '
12.81%
24.25% 1
I City of Lino Lakes
Management Report, Page 4
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owners (after deducting homestead and other credits) increased by less than
property g Y
The above comparison of 1981 and 1982 tax levies clearly indicates a significant
change in financing Minnesota local government. Prior to 1982, property taxes paid by
I4 -1/4% per year (1972 through 1981). The 1982 increase alone totaled 24 -1/4 %. The
largest part of this increase can be attributed to a change in State policy relating to
the financing of local education.
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Minnesota City and County tax levies are controlled by State levy limitation
statutes. Minnesota School District tax levies (for general education costs) are
controlled by State Foundation Aid Program calculations. Prior to 1982, the State
(through education aids paid to local school districts) financed approximately 55% of
these costs. The remaining 45% was financed by local property taxes. This formula was
IIchanged in computing the 1982 property taxes such that local property taxes provided 55%
of this revenue while State education aids provided 45% of the total revenue. State
IIbudget proposals for 1984 decreases the State portion to 40% with local property taxes
providing 60% of this revenue. The change in State policy was a primary cause of
increased local property taxes in 1982 and is indicative of future trends.
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State -wide credits deducted from taxes levied increased by $68,098,000 or 12.81% for
1982 over 1981. This, however, is misleading. These amounts represent credits deducted
from taxes levied. Prior to 1981, these amounts were entirely paid to local government.
During 1982, however, the State did not reimburse local government for the full amount
of these credits even though these credits were deducted from property taxes levied by
local government. Actual State payments for these credits to local government units
except school districts were reduced (from the anounts deducted from property taxes
levied) as follows:
Aid
Homestead Credits
Reduced Assessment Credits
Wetlands Credits
Native Prairie Credits
Total Reduction
Reduction
Amount Percent
$40,802,526 16.45%
1,173,911 14.03%
119,532 6.49%
13,843 22.84%
$42,109,812 16.30%
City of Lino Lakes
Management Report, Page 5
As a consequence of the above reductions (to local government except school
districts) 1982 property tax related State aid payments actually decreased from 1981
levels. More important, this decrease represents "lost revenue" to the local government II
units. This factor has been viewed by a bond rating agency as a limiting factor in the
ability of Minnesota cities to retire bonded debt. This situation can severely and
adversely affect the individual bond ratings of all Minnesota cities.
The above reductions represent "lost revenue" from tax -levy related State aids.
This was not the only "lost revenue" for Minnesota cities in 1982. The State also
reduced local government State aid to Minnesota cities, counties and towns, as follows:
Year
1981- Actual
1982 - Certified
1982 - Actual
City of
State Total Lino Lakes
Amount Percent Percent
(in 1,000's) Change Amount Change
$ 249,716 1.69% $ 157,862 7.75%
270,725 8.41% 171,011 8.33%
235,077 (13.17 %) 148,794 (12.99 %)
The above reduction of $35.6 million ($270,725,464 certified to and budgeted by
local government; less $235,076,945 actually paid to local government) when added to the
$42.1 million reduction in tax -levy related State aids represents "total lost revenue" . II
of $77.7 million for 1982. These combined reductions represent approximately 7% of the
total 1982 certified tax levies for Minnesota Cities, Counties and Towns. The City of
Lino Lakes portion of this "lost revenue" totaled approximately $34,000.
The State of Minnesota (as part of its policy of limiting local property tax
increases) also adopted a policy of sharing its tax revenues with local government and
local taxpayers in the form of aids and credits. The State's primary source of revenue
are income taxes (both corporate and personal) and sales taxes. These financial resour-
ces comprise over 75% of the State's non - dedicated operating revenue for the State's
II General Fund. Total State revenues increased by approximately 3% (each year) during the
1 City of Lino Lakes
Management Report, Page 6
IIState's 1980 and 1981 fiscal years, while State commitments were increasing at a much
illarger rate and inflation was at 11% and 12 %. This imbalance (to over- simplify) is the
State budget crisis.
ilThe State of Minnesota has taken several actions to resolve its budget problem. A
1 large part of these actions have been to pass the State's problem on to local government
as evidenced by the 1982 increases in local property taxes (primarily local School
IIDistricts) and decreases in property tax related State aids. Current proposals now
being considered indicate that the State will continue to reduce its commitments and
1 obligations to local government and local taxpayers to resolve the State budget problem.
IIOne indicator of the financial strength or independence of a governmental unit
II(including the State of Minnesota) is the level of fund balance or reserve balance of
the general fund. Reserve balances are especially necessary during periods of high
1 inflation and /or poor economic growth. Without adequate reserve balances, a governmen-
tal unit may be unable to respond to economic conditions. With adequate reserve
1 balances, adverse economic factors are more manageable.
1 The undesignated /unrestricted fund balance of the General Fund of the State of
Minnesota (according to published and audited Annual Financial Reports), was as follows
1 for the past four years:
II Undesignated
Fund Balance (Deficit)
(In 1,000's of Dollars)
1 Date Amount Change
June 30, 1979 $ 234,486
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IIJune 30, 1980 (16,965) $(251,451)
June 30, 1981 (73,044) (56,079)
June 30, 1982 (705,268) (632,224)
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City of Lino Lakes
Management Report, Page 7
Minnesota State Statutes governing State finances required "balanced budgets" at the
end of each biennium (i.e. June 30, 1979, 1981, 1983, etc.). The State's current
operating budget (fiscal year ended June 30, 1983) indicates revenues in excess of
expenditures totaling approximately $600,000,000 to eliminate most of the June 30, 1982
accumulated deficit of $705,268,000. A portion of this "improvement" has been at the
expense of local government as detailed in this Report. An additional portion of such
"improvement" has or will be accomplished by what has come to be known as "shifting"
(i.e. delaying payment of existing obligations and /or advanced recognition of future
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revenue). The following is a tabulation of certain major "shifts" and estimates of
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their effect upon the State's June 30, 1983 fund balance.
• LOCAL GOVERNMENT AID - Change in payment dates
from March to July through December of each
year ($265,073,300 @ 25 %)
• RENTERS CREDITS AND SENIOR CITIZEN AND DISABLED
TAXPAYERS CREDITS - Change in payment dates from
pre -July to post -June of each year (Estimate)
• SCHOOL DISTRICT PROPERTY TAXES -
1. Hold back 15% of tax levy related State
aids until after June 30, 1983 (State
Estimate)
2. Advance recognition of 1983 local property
taxes with a corresponding decrease in State
aid payments (State Estimates including
increased holdback from 10% to 15 %) for
Education Aids)
$ 66,300,000
100,000,000
49,700,000
233,000,000
Total $449,000,000
The "shifting" concept as it relates to aids and credits has the effect of deficit
financing when one considers the State and all units of local government within the
State as a group. The use of this concept at the levels shown cannot continue
indefinitely. The use of "shifting" prolongs but does not resolve the State's budget
problem.
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I City of Lino Lakes
Management Report, Page 8
The means of financing the cost of services provided by local government in
Minnesota is a complex process. The public policy of collecting taxes at the State
level to finance services being provided at the local level tends to increase the
complexity. Remembering the basic purpose or function of local government may help to
understand the concept better.
The basic function of local government is to collect financial resources (i.e.
taxes) and to expend these resources to provide services deemed necessary and beneficial
to the local community. From a financial viewpoint, it matters little how these ser-
vices are financed (i.e., through taxation at the State level or by direct taxation by
the local government unit). It matters only that these services are adequately
financed and that they are financed on a current and timely basis. Should the available
financial resources decrease (as is now happening), the level and /or cost of services
must also decrease or alternative financial resources must be obtained. State and local
government cannot expend financial resources which do not exist (i.e., which have not
been taxed). To do so is deficit financing.
1981 and 1982 have been pivotal years for Minnesota local government units. The
purpose of this Report is to detail the changes which have occurred and to offer a
perspective of the meaning of these changes. This however, does not present a solution
to the situation. The State of Minnesota has determined a solution to their budget
situation. A large part of the State's solution has been to pass the problem on to
local government, as follows:
A. Reduced local government aid to Cities, Counties and Towns and
reduced education aids to local School Districts.
B. Reduced or frozen homestead credits and other tax -levy related aids
and credits.
C. "Lost Revenue" to local government in the form of tax -levy related
credits to property owners which are not paid to local government
units.
D. "Lost Revenue" to local government in the form of local government
aid reductions after local budgets are adopted and often during the
late months of a budget year.
City of Lino Lakes
Management Report, Page 9
The effect of these State "solutions" is increased property taxes to m aintain the
same or reduced levels of service. These property tax increases are especially burden-
some on homestead property owners because the State will be paying a lesser propor-
tionate amount of property taxes on homestead property.
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It is now left to local government to determine a final and lasting solution.
Options available to local government fall into two primary categories.
1. Decrease the cost and /or level of services now being provided.
2. Determine and utilize alternative financial resources.
A final and lasting solution should and will probably be a combination of factors in
the above primary categories. Determining the level and degree of each factor are the
critical choices facing all elected and appointed local government officials. These
choices have not and will not be easy.
Local governments possess the ability and authority to reduce the level of services
below that now being provided. However, local government has only limited authority to
increase its financial resources to finance those services and levels of service deemed
necessary. The present levy limitations on Minnesota Cities plus decreasing State aids
will become extremely restrictive. An easing of the levy limitation restrictions seems
necessary as an alternative to severe reductions in levels of services now being pro-
vided by Minnesota Cities and Counties. Without additional financial resources (i.e.
authority), the only option available to Minnesota Cities will be to decrease the cost
and /or level of services being provided. To obtain these additional financial
resources, the State must be induced to ease the present levy limitation restrictions.
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1 City of Lino Lakes
Management Report, Page 10
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Minnesota local government now knows that it will bear a major share of the respon-
sibility for solving the current State budget situation. Having this knowledge helps to
IIdefine the problem facing your City and all Minnesota local government. All local
government elected and appointed officials must address the questions of:
1. Which local services must be continued and at what levels?
2. How may local government improve the efficiency of providing
local services?
3. Which local services are to be eliminated or diminished?
4. What additional taxing authority can be obtained to
finance those local services deemed necessary and
beneficial?
5. What alternative financial resources can be utilized to
finance those local services deemed necessary and
beneficial?
Fortunately for the citizens and local taxpayers of the City of Lino Lakes, the past
financial management of your City has been more prudent than that of the State of
Minnesota. Except for the effects of the State budget situation, your City has expended
its financial resources only as they have been made available. However, your City has
not retained operating reserves at sufficient levels to provide financial security and
independence. Having these reserve balances would have provided the City additional
time to address the effects of the State budget situation. (See later commentary.)
With the present situation, the State budget crisis is of greater concert to your City.
City of Lino Lakes
Management Report, Page 11
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 II
General Fund and two Special Revenue Funds (Revenue Sharing, Park and Playground Fund).
Financial reporting standards in effect allow a city to reasonably compare its financial
operations with its prior year or other similar cities.
The major financing sources for the City's General and Special Revenue Funds are
local property taxes and State Aids. Since 1979, these sources were as follows:
1979
1980
1981
1982
State
Amount
$ 184,184
239,622
300,971
283,089
Aids
Percent
35.05%
39.57
41.92
36.63
Property Taxes
Amount Percent
$ 166,149 31.62%
171,440 28.32
212,914 29.78
305,804 39.57
State aids have increased from $184,184 in 1979 to $283,089 in 1982. This is an
increase during the three year period of 57 %. Property taxes during that same three
year period increased by 28 %. State aids therefore, increased at double the rate of
property taxes.
The above indicates the trend of higher State participation in the financing of
basic local services had been increasing since 1979. The trend is now reversing,
starting in 1982.
The following schedules and charts reflect the overall 1982 and 1981 financial
operations of the City's General and Special Revenue funds.
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City of Lino Lakes
Management Report, Page 12
Total revenue for these funds for 1982 and 1981 were $772,878 and $717,938, as
follows:
1982 1981
Amount Percent Amount Percent
Local taxes $ 305,804 39.57% $ 212,914 29.67%
Special assessments 18,142 2.35
Licenses and permits 51,604 6.68 65,361 9.10
Intergovernmental revenue:
State 283,089 36.63 300,971 41.92
Federal 42,206 5.46 44,730 6.23
Local 2,825 .36 17,600 2.45
Charges for services 48,764 6.31 50,739 7.07
Court fines 10,935 1.41 8,216 1.14
Interest on investments 3,917 .51 8,137 1.13
Other 5,592 .72 9,270 1.29
Totals $ 772,878 100.00% $ 717,938 100.00%
1982
Charges For
Services
6.31%
Local Taxes
39.57%
State Aids
36.63%
1981
Charges for
Services
The increase in property taxes was partially caused by a levy collectible in 1982
for a portion of the City's LAWCON grant. The levy was $30,000 and is designated for
City share of that park development.
City of Lino Lakes
Management Report, Page 13
Total expenditures for these funds for 1982 and 1981 were $789,610 and $732,860, as
follows:
1982 1981
Amount Percent
Amount Percent
Current:
General government $ 220,175 27.88% $ 259,446 35.40%
Public safety 332,920 42.16 309,535 42.24
Highways and streets 189,546 24.01 115,275 15.73
Parks 36,005 4.56 29,982 4.09
Other 3,672 .47 4,822 .66
Capital outlay 7,292 .92 13,800 1.88
Totals $ 789,610 100.00% $ 732,860 100.00%
A graphic illustration of the above 1982 and 1981 expenditures is as follows:
1982
1981
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General
Government
27.88%
Highways and
Streets
15.73%
General
Government
35.40%
All Other
5.95%
Public Safety
42.16%
Public Safety
42.24%
Details of the above broad categories are presented in Statements 7 and 9 of the
Annual Financial Report.
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City of Lino Lakes
Management Report, Page 14
Combined Financial Statements
The Combined Financial Statements of the City are presented in Statements 1 through
5 of the 1982 Annual Financial Report. The following comments relate to those
statements.
Cash And Investments
December 31, Increase
Description 1982 1981 (Decrease)
Treasurer's balance $ 1,242 $ 770 $ 472
Investments - at cost 292,165 333,220 (41,055)
Savings account 116,154 111,541 4,613
Totals
$ 409,561 $ 445,531 $(35,970)
The treasurer's balance consists of the checking account balance and the City's
petty cash fund. During 1982 and 1981, the City maintained an average negative balance
IIof approximately $1,400 and $1,200 in the City's checking acocunt. These negative
balances are "book" balances only. These balances indicate that the City is depositing
cash not needed for current operations into interest bearing accounts. We recommend
that the City continue this practice of minimal balances in the City's checking account
to maximize investment earnings.
The City's savings account is used for daily investment purposes. During 1982 and
II1981, the City maintained an average month -end balance in this account of $44,000. This
account earns interest at a rate of 5.25% daily versus interest earned on certificates
of deposits or repurchase agreements in 1982 of 15.37% to 8.25 %.
During the latter part of 1982, the City reduced the usage of the 5.25% savings
account and correspondingly established a NOW account to improve the yield on very short
period investments. We concur with the strategy to maximize interest yields and recom-
mend that the City continue innovative techniques as market conditions change.
City of Lino Lakes
Management Report, Page 15
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, 1982. The following schedule
details these amounts.
Description
December 31,
1982 1981
State:
Local Government Aid, Homestead Credit
and other aids $ -0- $ 88,030
LAWCON 603 -0-
Dutch Elm Control -0- 2,883
Department of Transportation -0- 8,080
Federal:
Community Development Block Grant 5,316 -0-
Federal Revenue Sharing 7,363 11,614
LAWCON 634 -0-
Local:
Met Council - Planning Grant 2,828 15,352
MWCC - SAC Refund 425 -0-
MWCC - Maintenance Agreement 9,444 1,859
Total $ 26,610 $ 127,768
The amount receivable from the State at December 31, 1981 included November and
December payments which were withheld because of the State's "cash flow" problem. All
of these monies were received by the City on March 1, 1982.
The amount receivable from the MWCC for the maintenance agreement is delayed in
being received by the City. The City did apply for payment in October, 1982 for reim-
bursement for the first six months of costs. The MWCC, however, rejected that request
based on their need for further itemization of expenses to be reimbursed. The City has
not received the interim reimbursement or the final reimbursement. We recommend that
the City establish a format for expense reimbursement requests which will be acceptable
to the MWCC and file such reimbursement requests on a timely basis.
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City of Lino Lakes
Management Report, Page 16
II Taxes Receivable
The taxes receivable of $81,671 at December 31, 1982 represents amounts levied
against property but not collected by the County and remitted to the City as of December
31, 1982. The balance of taxes receivable has been fully reserved and not recognized as
revenue. This reserve is a change from prior years when delinquent taxes were con -
sidered to be 100% collectible and recognized as revenue when levied. Current
accounting standards require that property tax revenue be recognized when measurable and
available to finance current expenditures. The amount is measurable but is not
available to the. City to finance current operations. The effect of this change was to
decrease the beginning fund balances of the City by $44,255 at January 1, 1982. This
$44,255 will be recognized as revenue as the delinquent taxes are collected in future
years.
The amount of delinquent property tax collections has been as follows for the past
several years:
Percent of
Amount Current and Current Levy
Levied Delinquent Collections Collected
1979 $ 220,369 $ 218,402 99.1%
1980 287,689 280,543 97.5
1981 389,737 370,727 95.1
1982 544,842 507,426 91.0
IIIn 1982, the collection rate dropped by approximately 4 percent. This increased
delinquency rate was not entirely caused by property owners. The State of Minnesota is
delinquent on its portion of the certified levy (i.e. homestead credits). Certified
levies are sent to the County each year for collection. The State portion of homestead
credit is subtracted from the levy to be spread to property owners. The portion
II
subtracted for 1982, however, was not fully paid by the State. This reduced aid
amounted to over $11,800 for the City of Lino Lakes. This amount is a permanent loss to
the City.
City of Lino Lakes
Management Report, Page 17
The percent of taxes collected of 91% above would have been approximately 93% had
the State paid its portion in full. This 93% collection rate, however, represents the
fourth year of a decline in the City collection rate. Property taxes are a primary
source of City revenue. If the City continues to incur high tax delinquencies, the
funds which rely on these taxes will reflect a decline in operating results. We recom-
mend that the City monitor the collection rate for property taxes and prepare financial
forecasts (budgets) based on the expected delinquency rate.
Special Assessments Receivable
Special assessments receivable consisted of the following at December 31, 1982:
Delinquent
Deferred
Tax forfeit
City property
Delinquent - not spread for
collection
Total
$ 31,780
809,668
132,981
11,569
4,708
$ 990,706
Delinquent assessments consist of amounts which were collectible in 1982 and prior
years which have not yet been received. For 1982, the City's special assessment collec-
tions were as follows:
Delinquent balance - January 1, 1982
Assessments spread for collection
in 1982
Total collectible
1982 collections
Delinquent balance - December 31, 1982
1982 percent of current levy
collected
Special Assessments Collectible
1981 and
1982 Prior Total
$ -0- $ 16,356 $ 16,356
215,629 215,629
215,629 16,356 231,985
185,968 14,237 200,206
$ 29,661 $ 2,119 $ 31,780
86.2%
N/A 92.8%
The ability of the City to collect special assessments is vital to the financing of
Special Assessment Debt Service Funds. Special assessment bonds are sold with debt
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City of Lino Lakes
Management Report, Page 18
payments designed to correlate with assessment collections. The debt payments are fixed
and will not change. If the City does not collect assessments on a timely basis, cash
shortages in these funds may occur. We recommend that the City carefully monitor the
delinquent collection rate and provide supplemental financing if assessment collections
are not adequate to meet bonded debt payments.
Deferred assessments receivable represent the balance of assessment rolls which will
be spread for collection in 1983 through 1990.
The amount of tax forfeit assessments receivable was $132,981 at December 31, 1982.
These assessments are not currently being spread for collection. Most of these
assessments relate to the Improvement Bonds of 1982. Should the City not collect these
assessments, the financial position of the 1982 Improvement Bond Fund would be impaired.
The bond resolution issuing permanent financing for this issue anticipated reduced reve-
nue flows because of the tax forfeit situation. Deferred property tax levies were sche-
duled in that resolution to offset the potential effects of tax forfeited assessments.
We recommend that the City determine the status of this tax forfeiture and, if deemed
necessary, initiate a review of the financing of the 1982 Improvement Bond Fund (see
later comments) .
The amount presented as "City Property" totaled $11,569 at December 31, 1982. The
assessments on this parcel relate to a property which was acquired by the City in 1981.
The City has the option of "paying" these assessments to the appropriate debt service
fund from other City funds or it may cancel these assessments. 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 service 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
City of Lino Lakes
Management Report, Page 19
financing. We recommend that the City adopt a policy with regard to assessments on
City owned land and that such policy be formally recorded in the actions of the City
Council.
There are two parcels on an assessment roll which appear on City records as being
collectible in 1982 and 1983. The County, however, has not spread the amounts related
to these two parcels for either 1982 or 1983. We recommend that the City research the
cause of this situation and take corrective action.
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
recieved. During the course of our audit, we noted discrepencies in City and County
assessment records. One discrepency as discussed above, related to the parcels which
the County is not spreading for collection (but for which City records indicate there
should be a levy). Other discrepancies relate to receivable balances for deferred,
delinquent and tax forefeit assessments. 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 considered:
1. Maintenance of delinquent assessment records by parcel and fund. This
listing can be updated for receipts and adjustments at they occur. Each
year this listing should be compared to County records. Any differences
should be reconciled and appropriate adjustments made.
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City of Lino Lakes
Management Report, Page 20
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.
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, 1982.
Due From (To) Other Funds
The amounts recorded as due from (to) other funds were the result of reclassifica-
tion of receipts and disbursements and various other interfund transactions. The
following schedule reflects these amounts. Council authorization is required to effect
these interfund amounts and make the required cash transfers. We recommend that the
City record the cash transfers upon City Council authorization during 1983.
Due From Due To
Fund # Description Other Funds Other Funds
101 General Fund $ 2,432.72
302 1980 Certificates of Indebtedness $ 1,142.70
303 1981 Certificates of Indebtedness 1,290.02
502 1977 G.O. Improvement Bonds 131.40
504 1980 Improvement Bonds 1,247.24
509 1982 G.O. Improvement Bonds 1,115.84
Total $ 3,679.96 $ 3,679.96
We noted during the course of our audit that the City is following the practice of
writing out checks to transfer monies between City funds as approved by Council
resolution. We recommend that the City cease this policy and record interfund transac-
tions through journal entries in the City's financial accounting records.
City of Lino Lakes
Management Report, Page 21
Fixed Assets
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The City does not currently maintain accounting records of its general fixed assets.
IIThis situation is not uncommon for Metropolitan suburban communities. The benefits of a
system are improved financial reporting, better availability of insurance information
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.
Bonds Payable
Balance - January 1, 1982
1982 Bond Issues
1982 Bonds Retired
Balance - December 31, 1982
Special
Assessments
$ 1,217,920
Bonds Payable
General
Debt Totals
$ 142,400 $ 1,360,320
750,000 750,000
(981,320) (86,700) (1,068,020)
$ 986,600 $ 55,700 $ 1,042,300
The bonds mature in 1983 through 1991. In 1982, the City refinanced the $935,000
Temporary Bonds of 1979 by issuing the $750,000 1982 Improvement Bonds. Scheduled
bonded debt payments for all bonds including interest for 1983 is approximately $185,000. II
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City of Lino Lakes
Management Report, Page 22
II Fund Equity
Fund
Fund Balance:
General Fund
Special Revenue Funds:
Revenue Sharing
Debt Service:
Municipal Building Bonds of 1970
1980 Certificates of Indebtedness
1981 Certificates of Indebtedness
Capital Project:
Parks and Playgrounds
1981 Certificates of Indebtedness
Community Development Block Grant
LAWCON Grant
Special Assessment:
Improvement Bonds of 1977
Improvement Bonds of 1979
Improvement Bonds of 1980
Improvement Bonds of 1981
Improvement Bonds of 1982
Lakes Addition #7
Totals
Retained Earnings:
Sewer and Water Fund
Grand Totals
Fund Position (Deficit)
December 31,
1982 1981
$ 59,821
16,062
- 0-
465
(5,448)
103,349
63,868
- 0-
-0 -
11,736
- 0 -
44,128
9,070
141,467
(22,584)
421 ,934
7,087
$ 429,021
Increase
(Decrease)
49,985 $ 9,836
28,010
22,382
(274)
- 0-
90,642
109,980
- 0-
- 0-
(11,948)
(22,382)
739
(5,448)
12,707
(46,112)
9,462 2,274
108,675 (108,675)
55,695 (11,567)
6,710 2,360
-0- 141,467
(21,916) (668)
459,351 (37,417)
9,478
(2,391)
$ 468,829 $ (39,808)
We have commented on the various changes in fund positions in the following section
IIof this report.
General Fund
The financial statements for the General Fund are presented in Statement 6 and 7 of
the 1982 Annual Financial Report. The fund balance of the General Fund was $59,821 at
December 31, 1982 representing a $9,836 increase in fund balance during 1982 as follows:
City of Lino Lakes
Management Report, Page 23
Budgeted increase $ 32,000
Actual revenues over (under) budgeted revenues:
Licenses and permits $ (28,600)
Special assessments 18,000
Fines and forfeits 11,000
Charges for services .500
Tax collections and homestead credit (32,600)
Other revenue (1,700)
Net revenue under budget
Actual expenditures under (over) budgeted
expenditures:
General government
Public safety
Highways and streets
All other - net
Net expenditures over budget
(9,200)
7,800
(9,300)
(4,300)
(33,400)
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(15,000) '
Actual transfers over budgeted transfers 26,200
Total improvement $ 9,800
The budget variance on special assessments was the result of receiving assessment
collections on a prior bonded debt fund (which had been closed to the General Fund in
1981). This assessment revenue had not been budgeted. Additional assessments
receivable of the General Fund total $9,796 at December 31, 1982.
The amount of transfers over budget consists of $11,614 of additional Revenue
Sharing transfers to the General Fund and $14,620 transferred for the closing of the
Municipal Building Bonds of 1970 Debt Service Fund.
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Statement 7 of the 1982 Annual Financial Report presents additional detail relating II
to the above budget variances.
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City of Lino Lakes
I
Management Report, Page 24
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The overall fund balance of the General Fund has been as follows for the past
several years:
Year Ended
December 31,
1978
1979
1980
1981
1982
Fund Balance (Deficit)
Designated
$ 11,464
14,655
18,766
19,876
46,466
Increase
(Decrease) in
Undesignated Undesignated
$ 51,249
50,652 $ (597)
(19,730) (70,382)
30,109 49,839
13,355 (16,754)
The amounts presented for all years in the above schedule as "designated" consist of
prepaid insurance and amounts designated for road improvements. Prepaid insurance is
not available for other expendable purposes and therefore is designated for ensuing
years expenditures.
The amount designated at December 31, 1982 also includes a $30,000 designation 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,
IIbut rather is designated for transfers to the LAWCON Fund for the City's share of the
Country Lakes Park project. That project is funded 28% State, 30% Federal, with the
balance of 42% to be paid by the City. The total City share is estimated to be $82,000:
(see later comments regarding LAWCON Fund).
A common critique of local governments is the appearance of building and maintaining
unnecessary reserve balances. Prudent financial management, however, demands the main-
tenance of adequate reserves and is the responsbility of the governing body. Operating
reserves (for tax levy supported funds) are mandatory and not optional. The primary
purpose for maintaining operating surpluses is to provide for cash flow requirements
(working capital) during the first half of each calendar year before the City receives
its property tax settlement from the County. Property taxes are used to finance the
General and Special Revenue operating budgets of the City. These monies generally
City of Lino Lakes
Management Report, Page 25
finance expenditures which are paid evenly throughout the year. However, the City
does
not receive these monies until July and December of each year. Therefore, a cash flow
surplus equal to one -half of this levy is required to meet the daily cash flow needs of
the City prior to the receipt of these general property taxes. Without this level of
surplus, the City will be in a cash overdraft position (for its General Fund) prior to
the receipt of its first tax settlement in July of each year.
For 1982 and future years, the State has changed the timing of local government aid
payments to all Minnesota cities. Such a change resulted in the City not receiving any
local government aid until July of each year instead of equal payments four times each
year. The "minimum required reserve" has therefore increased by one -half of such aid.
A second reason for maintaining operating reserves is to provide a source of
emergency and /or unanticipated expenditures (i.e. extraordinary storm damage, diseased
trees, inflation, etc.). Operating budgets are estimates only. Inflationary factors
effecting both routine procedures and emergency type costs can adversely effect the
budget process. A city requires a reserve to finance these events. One method of
measuring the amount of this type of reserve is to use a percent of the City's annual
operating budget (i.e. 5% to 10% or more, depending upon the overall budget philosophy
of the City).
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A third reason for maintaining an operating reserve is to provide for future changes
in the level of shared taxes (i.e. aids) by the State and Federal governments. 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 outcome of these situations are yet
to be defined, it appears certain that past trends of increasing aids to ci ties by both
the 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. Local government
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' City of Lino Lakes
Management Report, Page 26
IIofficials may be required to respond with a variety of techniques to replace lost
revenue. Some cities are now assessing street maintenance, others are reviewing rates
Iand structure of charges for all governmental services.
IIThe level of the fund balance of the City's General Fund is one indicator of the
financial strength or independence of a City. This often becomes critical during
IIperiods of high inflation, decreasing State aids, and poor economic growth. Without
IIadequate reserves, a City may be unable to respond to external factors such as State aid
cuts or even changes in the timing of these payments. With adequate reserves, these
IIexternal factors are more manageable by the City.
IIAn adequate fund balance for a City's General Fund is required for sound financial
management of the diversified services provided by a City. A City's General Fund is the
IIunofficial (and sometimes official) financial backer for all other City funds.
Inadequate funding of various special purpose activities (funds) places an implied
IIliability on the General Fund.
IITemporary cash overdrafts of certain funds must have offsetting cash balances in
IIother 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
II cash overdrafts. The cash overdraft of the General Fund was in excess of $221,000 at
June 30, 1982. For 1982, the General Fund had a positive cash balance only in the month
1 of December. No local government aid will be available to the City until July for 1983
IIand the first half tax allocation will also not be available until July, 1983.
I Currently, the City is not meeting the minimum required fund balance for the General
Fund. This minimum required fund balance is measured by the cash -flow needs of the
II General Fund. To measure this minimum cash -flow amount, the following criteria should
be applied:
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City of Lino Lakes
Management Report, Page 27
One half of the General Property Tax Levy plus one half of State
aids. The General Fund incurs operating expenditures throughout
the year at a reasonably constant pace. Most of the anticipated
revenue required to meet these expenditures for the first half of
the year is, however, not available. The revenue referred to is
property taxes and State aids. Property taxes are remitted to the
City primarily in two installments (July and December). State
aids are remitted to the City in monthly installments from July
through December. Virtually, none of these monies are available
to meet the expenditures of the first half of the year.
Therefore, one -half of each of these revenue sources must be
available at the start of the year to avoid cash overdrafts during
that period.
For the City of Lino Lakes, the minimum required surplus (applying the above
criteria) is $303,000 computed as follows:
1983 Budgeted Levy (Includes Homestead Credit)
1983 Anticipated Local Government Aid
Total
$ 430,631
171,011
$ 606,663
Minimum Required Cash -Flow Reserve
(One -Half of Total) $ 303,000
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The above minimum reserve of $303,000 was increased greatly by the State's change in II
timing of homestead credit and local government aid payments. The continued delay in
State aid payments is likely. There may be some relief available, however, if the State II
adopts a change in timing of property tax remittances from twice a year to four times a
year. This situation should continue to be monitored and minimum cash flow requirements
measured accordingly.
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The City should begin the process of increasing the fund balance of the General Fund II
in order to respond to cash flow needs of the City and State imposed changes. An
appropriated level of operating reserve for the City's General Fund should be adequate
to:
• Meet the minimum cash flow needs of the General Fund.
• Provide a source of funding for emergency and /or unanticipated expenditures.
• Provide a means of dealing with further State and Federal aid cut -backs or
delays in payment.
• Establish reasonable assurance that the City's General Fund is in a position
to provide back -up financing for other City funds should such circumstances
arise.
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City of Lino Lakes
Management Report, Page 28
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 unba-
lances budgets (surplus versus deficit budgets). The General Fund balance currently
totals $59,821. Most of that amount ($46,466), however, has been committed for ensuing
years' expenditures. We recommend that the City address the issue of General Fund
reserves and take action to achieve and maintain the desired levels through formal
Council action and /or policy statements.
Special Revenue Funds
The financial statements of the Special Revenue Funds are presented in Statements 8
IIand 9 of the 1982 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 maintained Federal Revenue Sharing in 1982 as
the only Special Revenue Fund of the City. The fund balance of the Federal Revenue
Sharing fund of $16,062 at December 31, 1982 consists of the fourth quarter allotment
receivable ($7,363) and accumulated interest earned over the past years. The City has
appropriated the 1983 entitlement to be transferred to the General Fund for police
protection.
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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 1982 with two exceptions. The
City failed to publish the notices in the format required by the Office of Revenue
Sharing for the proposed use hearing and the budget hearing. We recommend that the City
continue to publish all required notices and monitor the notices to assure compliance
with Revenue Sharing regulations.
City of Lino Lakes
Management Report, Page 29
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For 1982, the City designated the Revenue Sharing monies to be expended for "roads ". II
For 1983, the City has designated Revenue Sharing monies for the "police department ".
Budgeting of Revenue Sharing monies should be on a basis consistent with the level of
detail of other City budgets. Therefore, sufficient detail should be included in the
Revenue Sharing budget to determine the intended use (such as police - salaries, roads
- equipment, etc.). In addition to budgeting on this basis, the City should have the
ability to support expenditures with specific vouchers (or checks). We recommend that a
record be maintained at the City which details specific expenditures funded with Federal
Revenue Sharing monies.
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.
Debt Service Funds
The combining financial statements of the City's Debt Service Funds are presented in
Statements 10 and 11 of the 1982 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 three general debt
bond issues outstanding during 1982. During 1982, the City retired two of these issues
as follows:
• the Municipal Building Bonds of 1970.
• the 1980 Certificates of Indebtedness.
The Municipal Building Bonds had cash assets remaining of $14,620 after final bond
payment. This amount was transferred to the General Fund per Council authorization in
1982.
The 1980 Certificates •f Indebtedness had remaining cash assets of $465 at December
31, 1982.
We recommend that the City close this fund in 1982 to the City's General Fund
with appropriate City Council approval.
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City of Lino Lakes
Management Report, Page 30
1981 Certificates Of Indebtedness
The 1981 Certificates were issued to finance various capital outlay expenditures of
the City. This issue is the only general bonded debt issue the City has outstanding as
of December 31, 1982. A projection of the fund position based on future scheduled tax
levies and debt requirements is as follows:
Fund balance (deficit) - December 31, 1982
Additions:
Future scheduled tax levies
(5,448)
64,772
Deductions:
Future debt requirements:
Principal 55,700
Interest 5,988
Total 61,688
Projected fund balance (deficit) $ (2,364)
Normal projected fund balance -
5% of debt requirements $ 3,084
The above projected deficit is the result of tax levy collections being less than
100% for the 1981/82 levy (see earlier commentary). We recommend that the City monitor
this fund and provide additional financing as needed through a supplemental tax levy
collectible in 1984 or through the transfer of the residual balance of the related
Capital Project Fund (if available).
City of Lino Lakes
Management Report, Page 31
Capital Project Funds
The financial statements for the City's Capital Project Funds are presented in
Statements 12 and 13 of the 1982 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, 1982
and 1981 were:
December 31, Increase
Fund 1982 1981 (Decrease)
Parks and Playground $ 103,349 $ 90,642 $ 12,707
1981 Certificates of Indebtedness 64,746 109,980 (45,234)
Community Development Block Grant -0- -0-
LAWCON Grant (878) -0- (878)
Totals $ 167,217 $ 200,622 $(33,405)
Parks and Playground
This fund was established to account for dedicated park fees. The fund balance of
$103,349 at December 31, 1982 is available for expenditures by the City to fund capital
outlay and maintenance of dedicated park lands.
During 1982, the City received park dedication fees of $3,720, interest of $9,564
and donations from various City groups of $4,600.
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 $12,306 at
December 31, 1982.
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. The City is considering the
establishment of a separate Special Revenue Fund to account for donations from various
groups to provide better data as to the disposition of these separate monies.
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City of Lino Lakes
Management Report, Page 32
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 1982 and 1981:
Over
(Under)
Description Bu..et Actua Budget
Police Cars $ 21,747 $ 2,00P $ (253)
Dump Truck -0- , 58,000 (58,000)
Tractor 18,503 12,000 6,503
1-Ton Truck 11,416 11,000 416
Squad Car Equipment 3,223 4,400 (1,177)
Wing Plow 2,708 4,000 (1,292)
Totals $ 57,597 $ 111,400 $ (53,803)
The City completed the purchase of all the above budgeted equipment except for the
dump truck. Bids were let on the truck in September of 1982 in the amount of $47,765.
The following schedule summarizes the activity of this fund through December 31, 1982.
Proceeds for issuance of certificates
Interest earnings:
1981
1982
$ 111,400
1,288
9,901
Total revenue provided $ 122,589
Expenditures:
1981
1982
Total expenditures
Fund balance - December 31, 1982
Less: Equipment ordered but not received
Fund balance unappropriated
2,707
55,136
57,843
67,746
47,765
$ 19,981
The above unappropriated fund balance of $19,981 is available to be expended on
additional City equipment or transferred to the Debt Service Fund for the Equipment
Certificates of 1981. We recommend that the City, upon completing scheduled purchases,
determine the intended use of the remaining balance and appropriate for that purpose in
1983.
City of Lino Lakes
Management Report, Page 33
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
1 Lakes is considered to be a sub - grantee and will have to comply with the provisions of
the grant agreement. We recommend that the City determine the compliance procedures
that will be required and document in City 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.
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In 1982, the City appropriated the 1981 and 1982 block grant funds for:
• Construction of Senior Citizen facility.
• Alexander House.
The City has incurred preliminary expenses in developing the plan for the Senior
Citizen facility in the amount of $5,316 in 1982 as follows:
Expenditures:
Architectural $ 5,309
Other 7
Total expenditures $., 5,316
Grant revenue equal to the above amount has been recorded as a receivable at
1 December 31, 1982 under the 100% reimbursement feature of the CDBG program. The City is
contemplating an expansion to the project to include City Hall upgrading. Such expan-
sion must have a viable financing source. Should the City expand the project to have a
portion funded by the City, detail records of cost allocations must be maintained to
allow for segregation of City versus CDBG types of expenditures. We recommend that the
City establish procedures to maintain such accounting data should the expansion to the
project be approved.
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City of Lino Lakes
Management Report, Page 34
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 receive the grant monies approved.
We recommend that the City develop controls to insure that all expenditures related
IIto 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 was as follows at December 31, 1982:
Revenue:
State Grant (28% of expenditures)
Federal Grant (30% of expenditures)
Total revenue
Expenditures:
Engineering
Survey
Total expenditures
602
635
1,187
928
1,237
2,115
Fund balance (deficit) - December 31, 1982 $ (878)
The above fund deficit 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's General Fund. As the City incurs expenditures, we recommend that the City
annually fund the City share from the General Fund or other designated City sources.
City of Lino Lakes
Management Report, Page 35
Special Assessment Funds
The financial statements of the Special Assessment Funds are presented in Statements
14 and 15 of the 1982 Annual Financial Report. A Special Assess g
to account for both the construction and financing of assessable improvement projects.
Lent Fund is or anized
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.
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
provided" is reported to increase the fund equity to zero. This "amount to be provided"
is each funds' supplemental financing requirement. This supplemental financing pri-
marily 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.
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City of Lino Lakes
Management Report, Page 36
Debt Service Fund
Improvement Bonds of
Improvement Bonds of
Improvement Bonds of
Improvement Bonds of
Totals
Fund Scheduled
Position Future
12/31/82 Tax Levies
1977 $ 11,736
1980 44,128
1981 9,070
1982 141,467 $ 336,667
$ 192,706 $ 336,667
Future 1
Add:
Assessments
$ 6,200
38,400
26,400
272,400
nterest
Deduct:
Bonds
$ 4,740
33,000
24,025
352,373
$ 343,400 $ 414,138
Total projected fund position
Less: Tax forfeit assessments included in projections
Adjusted projected fund position
Statutory reserve (5% of unmatured bond requirements)
Excess projected fund position
Projected Year of
Fund Final
Position Maturity
$ 13,196 1987
49,528 1986
11,445 1991
398,161 1991
472,330
123,185
349,145
70,000
$ 279,145
The overall actual and projected fund positions of the Special Assessment Funds
indicate that these bond funds are adequately financed at
inclusion of the scheduled tax levies for the 1982 Bonds.
Improvement Bonds of 1981
December 31, 1982, with the
A summary of the transactions related to the 1981 Improvement Bonds is as follows:
Revenue:
Interest revenue
Assessment roll adopted
Total revenue
Expenditures:
Construction costs
Debt service - interest and
paying agent fees
Total expenditures
Fund balance - December 31, 1982
1981
$ 254
254
1982
Total
$ 1,438 $ 1,692
45,000 45,000
$ 46,438 46,692
$ 30,872 $ 1,113 31,985
$ 30,872
5,637
$ 6,750
5,637
37,622
$ 9,070
The above schedule indicates that the project was assessed based on the bond issue
principal amount. Assessments are intended to recover all costs associated with the
construction project as follows:
• Direct construction expenditures.
• Capitalized (construction period) interest.
• Administrative or applied overhead type costs.
City of Lino Lakes
Management Report, Page 37
When bonds are sold in excess of actual expenditures, the unspent bond proceeds are
available in lieu of additional assessments. For this project, we were unable to locate
a tabulation of the above factors which totaled $45,000.
We recommend that the City review its assessment procedures and esta blish a method
of assessing which considers the above listed factors.
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Improvement Bonds of 1982
In 1982, the City refinanced the Temporary Bonds of 1979 by issuing permanent bonds
in the amount of $750,000. The new issue was sold at a higher rate of interest than the
assessments which were pledged for repayment. Due to this situation, the City
reassessed the assessments at a higher rate to more closely match the new rate the City
incurred. We concur with this strategy and recommend that future assessment of projects
(prior to final bonding) include a provision to increase interest on assessment upon
securing permanent financing.
Lakes Addition #7
Lakes Addition #7 has had the following transactions from inception:
1981 1982 Total
Miscellaneous $ 183 $ -0- $ 183
Preliminary Construction Costs 22,099 668 22,767
Fund deficit - December 31, 1982 $ (22,584)
The above deficit should be funded through a permanent bond sale to finance the
project. If the project is not ordered, the City may charge the developer directly
through a letter of credit arrangement.
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City of Lino Lakes
IIManagement Report, Page 38
Administrative Construction Charges
The City incurs expenditures in the General Fund through use of Administrative time
and effort in the completion of construction projects. Additionally, there are future
expenditures related to the maintenance of related debt service accounts. 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 contract (either a flat percent or a sliding percent based on the size of the
project). The City has charged certain of these fees in the past. There is not
however, a policy statement on what percent is to be charged and /or the timing of such a
IIcharge. We recommend that the City establish a policy through a resolution which will:
• Establish the percent of such charges.
• Establish the timing of such charges (annually or upon project completion).
• Determine any restrictions on the use of such monies (or if such monies will
be considered General operating revenue).
The establishment of the preceding policy will aid the City in recovering the City's
cost associated with construction projects.
Enterprise Fund
The Enterprise Fund of the City of Lino Lakes financial statements are presented in
the 1982 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.
City of Lino Lakes
Management Report, Page 39
Operating Income:
Water billings
Sewer billings
Total operating income
For The Year Ended December 31,
1982 1981
Amount Percent Amount Percent
$ 6,461
23,688
30,149
21.43%
78.57
100.00
5,153
19,623
24,776
20.80%
79.20
100.00
Operating Expenses:
Personal services 15,050 49.92 17,396 70.21
MWCC 14,625 48.51 12,149 49.04
Repairs and maintenance 9,828 32.60 5,427 21.90
Depreciation 180 .60 149 .60
Other 5,157 17.10 3,698 14.93
Total operating expenses 44,840 148.73 38,819 156.68
Income From Operations (14,691) (48.73) (14,043) (56.68)
Other Income /(Expenses):
MWCC maintenance agreement 14,295
Interest on investments -0-
Utility rate study (1,995)
Net Income /(Loss) $ (2,391)
47.41
(6.62)
(7.94 %)
8,300
551
-0-
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33.50
2.22 '
(5,192) (20.96 %)
The net loss of the Water and Sewer Utility fund decreased by $2,800 from 1981.
City reviewed and increased sewer utility rates in 1982, effective for the fourth
quarter of 1982. The City should continue to review rates annually and make adjustments II
to the rates based on costs incurred and expected to be incurred. The City's water
revenues most probably increased in 1982 as a result of increased usage due to decreased,
rainfall during the summer months (there was not a water rate increase). Rainfall was
14.27 inches from April through September of 1982 as opposed to 19.05 inches in 1981.
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The Metropolitan Waste Control Commission (MWCC) bills the City annually on an esti-
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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 1
fund. The MWCC billings for the period 1977 to 1983 were as follows:
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City of Lino Lakes
Management Report, Page 40
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 Not available
1983 19,027 22.7 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 1983 over
1982 for the City of Lino Lakes is 8.7 %. 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 estimate $674 to an estimated $761. This respresents
an increase of 12.9 %. The combination of these factors increased the City's estimated
cost in 1983 by nearly 23 %. 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
th increase, however, must be borne in full by existing users or be subsidized by
overall City operations.
II The City has no control over the billings from the MWCC for the sewer treatment
costs. This operating expense comprises 62% of the 1982 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.
The City has had a Water and Sewer Utility Rate Analysis (dated March 31, 1982).
That analysis included proposed increases in utility rates as follows:
City of Lino Lakes
Management Report, Page 41
Percent
Current Proposed Increase
Water:
Flat charge per quarter 7.50 20.00 167%
Usage charge per thousand gallons 1.00 1.50 50%
Sewer:
Flat chage per quarter 25.00 39.50 58%
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The above increases were proposed based on losses sustained in the utility operations 11
over the past several years. Additionally, the analysis included a provision for unan-
ticpated repairs.
The effect of not funding utility operations is to require other funds of the City
to absorb the losses of such operations. The cash overdraft of the Utility Fund was
$16,583 at December 31, 1982. This overdraft will continue to increase if utility
operations are not fully financed through user rates or other City sources.
Operating expenses can be monitored and reviewed with one major exception - the pass
through costs of the MWCC (see previous discussion). There will be, however, a limit to
the degree of expense reduction available before the quality of service declines.
Because this remedy is limited, the City must consider changes to the revenue sources
available.
The use of a subsidy from other City funds must be carefully considered. The City
does not have operating reserves available in other City Funds at this time to sub-
sidize utility operations. Additionally, the philosophy of subsidizing such operations
with general City monies should be reviewed in that it is contrary to the overall prin-
ciple of "self sustatining" operations normally applied to enterprise operations of this
type.
The final alternative is utility rate increases. This alternative may be t he most
viable under the current circumstances. The rate increases recommended in the rate
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City of Lino Lakes
Management Report, Page 42
IIstudy may be overburdensome to instill in one rate change. The City could, however,
adopt a plan for annual increases. The rates will require substantial increases, but
can be achieved gradually. We concur with the need for increased utility rates and
IIrecommend that the City adopt a plan for such increases.
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Internal Accounting Controls
Our examination included a review of the City's system of internal control. A
system of internal control comprises the plan of organization and all of the coordinate
methods and measures adopted within a City to safeguard its assets; check the accuracy
and reliability of its accounting data; promote operational efficiency; and insure
adherence to Council policies and various Federal, State and local statutes.
The City adopted an assessment roll on August 9, 1982 (Resolution 82 -15). That
resolution made reference to a copy of the proposed assessment and made that listing a
part of the resoultion. We could not locate the listing which was to be attached to the
' resolution in the official records of the City. Minutes and resolutions are a vital
link to determining Council actions and must be transcribed on an accurate and timely
basis. Our audit disclosed that the City is maintaining this documentation in a timely"
and accurate manner with the exception of the above resolution. We recommend that the
City continue efforts to maintain minutes and resolutions on a timely and accurate
' basis.
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An accounting system is a part of the overall system of internal control and it is
the means by which information is accumulated, recorded, classified, summarized and
IIreported. The prime purpose of any accounting system is to provide complete and
accurate financial information: (1) in proper form, (2) on a timely basis and, (3) cost
efficiently.
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City of Lino Lakes
Management Report, Page 43
Current auditing standards require an auditor to communicate any material weaknesses
in internal accounting controls directly to City Council and /or City Administrator. Our
IIexamination for 1982, disclosed no material deficiencies in the City's system of inter-
nal controls not identified in this report to the City Council.
Financial Management Requirements
Our audit proposal of November 5, 1982 included a section regarding Financial
Management Requirements /Environment. This section deals with significant changes
IIeffecting Minnesota cities and more specifically the City of Lino Lakes, Minnesota. For
your reference, we have repeated this section in this report.
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Financial management requirements for all Cities (Nationally) have increased tremen-
dously during the past several years. Prior to 1970, most Minnesota Cities reported
their financial activity substantially on the basis of cash receipts and cash
disbursements. The financial management of a City was limited to budgetary controls to
assure that cash disbursements did not exceed budget, for the budgetary funds. This
control was considered effective as long as the City limited its financial activities to
the budgetary funds and all expenditures were paid promptly. Such controls are still
used by small and /or out -state communities.
During the early 1970's the "New York situation" (plus subsequent events) created a
completely new environment for governmental financial management. Organizations nor-
mally not aware of sound financial management are now greatly concerned in this area.
Organizations which were concerned with sound financial management are now more aware
and more concerned. The new environment is such that financial management controls con-
sidered to be adequate in the past are now considered to be inadequate or minimal.
Future standards are expected to increase the level of financial management.
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I City of Lino Lakes
Management Report, Page 44
This new and changing environment places a greater burden upon the elected and
appointed officials of all governmental units, especially upon the finance departments.
How these burdens (or challenges) are addressed today will have a significant effect
IIupon the City's ability to meet the standards to be imposed in the future.
The Cities of Minnesota have not ignored these challenges. During 1978, (in
response to the new environment) the State Legislature enacted the City Financial
Reporting Act of 1978. Subsequent thereto, the Minnesota State Auditors Office issued
its "Minimum Reporting Requirements - City Financial Reporting ". This document (which
was effective for Minnesota Cities for 1978) incorporates changes and requirements to be
enforced on non - Minnesota Cities for 1980. As usual, Minnesota Cities are meeting the
new challenges. This aggressive approach will assure that Minnesota communities will be
able to meet the standards to be imposed in the future.
The City of Lino Lakes, also, has not ignored these challenges. The City's current
Annual Financial Reports incorporate the changes and modifications required by the new
"Minimum Reporting Requirements - City Financial Reporting ". We commend the City for
this achievement; however, there are improvements to internal systems which will facili-
tate a more efficient and timely control over the financial records of the City.
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
II and limits the effectiveness of the overall system of accounting and reporting.
City of Lino Lakes
Management Report, Page 45
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
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
top priority of the City. Full implementation should include:
• Obtaining capability (in -house computer system or ser-
vice 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.
• Full general ledger accounting controls over all assets,
liabilities and equity accounts in addition to revenue
and expenditures.
• Recording of the January 1, 1983 beginning account
balances based upon the December 31, 1982 audited
balances.
• Gradual conversion from the cash mode to the accrual/
modified accrual mode with complete conversion projected
to occur by December 31, 1983.
• 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.
• Implementation of internal audit techniques and
procedures to timely assure the accuracy and propriety
of recorded transactions and, therefore, 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
operations of the City.
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I City of Lino Lakes
Management Report, Page 46
• 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 construc-
tion projects.
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 per-
formance 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
Iinternal 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
I 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 is
currently reviewing an alternate accounting system. Our office is available to assist
the City in evaluating and implementing alternate accounting systems.
City of Lino Lakes
IIManagement Report, Page 47
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Summary
A summary of areas to be reviewed and or monitored by the City of Lino Lakes is as
follows
• Prepare financial forecasts (budgets) based on changes in the State's financial
situation (Pages 1 through 10)
• Improve expense reimbursement procedures as they relate to the MWCC maintenance
agreement. (Page 15)
• Monitor the property tax collection rate. (Page 16)
• Monitor delinquent and tax forfeit assessments to assure timely financing of
related bonded debt. (Pages 17 and 18)
• Improve internal accounting controls over the special assessment process.
(Page 19)
• Consider the benefits of establishing fixed asset records. (Page 21)
• Review the minimum required reserve needs of the City's General Fund and
establish a plan to achieve and maintain such a reserve. (Pages 23 to 27)
• Review Revenue Sharing publication and accounting record procedures.
(Pages 28 and 29)
• Close the 1980 Equipment Certificate fund and monitor the financial position of
the 1981 Equipment Certificate Fund. (Page 30)
• Monitor City portion (if approved) of CDBG funded project for the Senior
Citizen facility and maintain all compliance records required for CDBG funding.
(Page 33)
• Monitor compliance with the LAWCON Grant and provide City funding on a timely
basis. (Page 34)
• Monitor the projected financial position of the special assessment debt service
funds. (Pages 36 and 37)
• Take action to provide funding of sewer and water operations. (Pages 39 to 41)
• Continue efforts to maintain accurate and timely documentation of official City
minutes and resolutions. (Page 42)
1 • Review and update financial management systems. (Pages 43 to 46)
Respectfully submitted,
Z.6 a—De -
DE LA HUNT VOTO & CO., LTD.
' Certified Public Accountants
May 5, 1983