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Home My WebLink AboutAudit Management Letter CITY OF OAK PARK HEIGHTS, MINNESOTA AUDIT MANAGEMENT LETTER December 31, 2005 m - Q a I I - i b N r i T Y - - wool OM06 IL -P= r Audit Management Letter Report Summary REPORT SUMMARY Several reports are issued in conjunction with the audit. A very brief summary is as follows: Report Name Elements of Report Overview Annual Financial Report (AFR) • Financial statements • Unqualified ( "clean ") • Footnotes opinion on the Financial • Required supplementary Statements information • Statistical information Report on Internal Control and on Results of testing ® No compliance findings Compliance and Other Matters • Internal controls over financial • One reportable condition in reporting internal control. • Compliance with laws, regulations, contracts and grants State Legal Compliance Report • Results of testing certain • One compliance finding provisions of Minnesota Statutes Audit Management Letter Intended to be a working tool for City Council • Comparisons and trend analysis • Outside factors influencing the City, such as State funding • Policies and procedures • Audit Management Letter Statement of Activities Statement of Activities One of the financial statement presentations required by GASB 34 is the Statement of Activities. This schedule presents the net cost of providing various activities and the extent to which these activities are funded by property taxes, and investment earnings. Program Revenues Net (Expense) Revenue and Operating Capital Changes in Net Assets Charges For Grants and Grants and Governmental Business -Type Functions /Programs Expenses Services Contributions Contributions Activities Activities Total Bids pernuts. tines. State a,�ttce aic6, Bayport inspectiod, '. 'det,st on e}dnun (°ttnm�r' Kt Safoarad Sobers assessmertit rokls i €int�rytrsa fltf ds chmgc grant Governmental activities: General government $882,800 $148,673 $750 $ - ($733,377) $ ($733,377) Public safety 1,210,179 569,227 86.393 15,00 (539,559) (539,559) Public works 511,137 235,116 1,086 47,686 (227,249) (227,249) Parks and recreation 138378 22,952 (115.426) (115,426) Interest on long-term debt 55,695 (55,695) (55,695) Total governmental activities 2,798,189 975 88,229 62,686 (1,671,306) 0 (1,671,306) �tcKwn Sgrat, avclop r Business-type activities: e mbucati�ntent,Fonn�enon Water 373,996 423 ",'lls' 49,880 49,880 Sanitary sewer 560,876 705,456 144,580 144,580 Storm sewer 34,150 73,546 39,396 39,396 Sanitation 164,572 96,859 - (67,713) (67,713) Total business -type activities 1,133,594 1,299,737 0 0 0 166,143 166,143 Total $3,931,783 $2,275,705 $88,229 $62,686 (1,671,306) 166,143 (1 General revenues: General property taxes 2,222,335 - 2,222,335 Grants and contributions not restricted to specific programs 2,040 - 2,040 Unrestricted investment earnings 258,614 29,268 287,882 Gain on sale of capital assets 950 - 950 Other 24,256 - 24,256 Transfers (416,944) 416,944 - Total general revenues and transfers 2,091,251 446,212 2,537,463 Change in net assets 419,945 612,355 1,032,300 Net assets - beginning 17,828,506 6,409,857 24,238,363 Netassets - ending $18,248,451 $7,022,212 $25,270,663 ... Includes General Fund, Special Revenue, Debt Service and Capital Project Funds. City of . Park Heights, Minnesota Audit Management Letter Analysis of Selected Accounts ANALYSIS OF SELECTED ACCOUNTS Summary of Financial Activity The schedule below presents a condensed financial summary of all funds: All Funds Financial Summary - 2005 Increase (Decrease) in Fund Balance/ Revenue Expenditures Fund Balance/ Net and Other and Other Transfers Net Assets Fund Sources Uses (Net) Assets 12/31/2005 General $3,115,966 $2309,701 ($550,130) $256,135 $2,103,743 Special Revenue Funds: Forfeiture and Seizure 6,042 12,766 (6 22,119 Economic Development 1,782 504 - 1,278 53,602 Debt Service Punds: Bonds of 1998 114,744 172,812 50,000 (8,068) 105,076 Bonds of 2002 8,012 165,323 - (157,31 1) 109,707 Bonds of 2001 30,403 111575 8,640 (74,532) - Capital Project Funds: Capital Revolving 57,701 17,139 52,740 93,302 458.382 Budgeted Projects and Equipment Revolving 16,446 4.456 325,150 337,140 733,219 Park Development 34,644 - - 34,644 358,719 Street Reconstruction 14,986 9,934 100,000 105,052 510,826 Renewal and Replacement 82,821 - 155,198 238 2,645,595 Brekke Park Memorial 8 - 8 237 Water Tower Rental 23,593 - 23,593 31,942 Boutwells Landing 208 208 - - McKean Square Capital Project Fund 132,272 132,272 Oak Park Station - Phase 1 1,444 1,444 Novak Avenue Street and Utility Improvements 5,267 5.267 - - Sanitary Sewer Connection 28,942 - (25,250) 3.692 396,939 Water Connection 34,469 - (8,750) 25,719 241,754 Storm Sewer Connection 99,726 218,721 (16,000) (134,995) 730,295 Enterprise Funds: Water 693,897 373,996 (93,850) 226,051 3,708,489 Sanitary Sewer 970,045 560,976 (82,948) 326,221 3,276,937 Storm Sewer 76,729 34,150 (3,300) 39,279 121,747 Sanitation 96.876 164,572 88,500 20,804 (13,754) Total $5.647,023 $4,297.716 $0 $1,349,307 $15,595,574 City of . Park Heights, Minnesota Audit Management Letter Analysis of Selected Accounts Property Taxes Property taxes receivable consist of taxes levied in the previous seven years by the City but not yet collected by the County and remitted to the City. The collection rate on property taxes remains strong as illustrated below. 2002 2003 2004 2005 Tax levy certified $1,967,579 $1,993,003 $2,054,070 $2,293,825 Less market value homestead credit (100,985) (88,486) (88,534) (85,647) Net levy 1,866,594 1,904,517 1,965,536 2,208,178 Receipts: Current property taxes 1,803,503 1,891,046 1,938,726 2,176,290 Delinquent property taxes (18,789) 12,386 12,016 20,627 Total receipts 1,784,714 1,903,432 1,950,742 2,196,917 Adjustments (85,905) 10,293 (4,714) (7,830) Increase (decrease) in delinquent taxes receivable (4,025) 11,378 10,080 3,431 Delinquent taxes - January 1 24,199 20,174 31,552 41,632 Delinquent taxes - December 31 $20,174 $31,552 $41,632 $45,063 Current collection as a percent of current levy 96.8% 99.3% 98.6% 98.6% Total collections as a percent of current levy 90.7% 95.5% 99.2% 99.5% ( ' ) For 2003, 2004 and 2005, MVHC was not paid by the State to the City. During 2002, the taxable valuation of the St. Croix Mall was reduced resulting in abatements of unpaid taxes on this property, and the repayment by the City of taxes collected in prior years. Audit Management Letter Analysis of Selected Accounts Tax Levies, Tax Rates and Tax Capacity A comparison of values for taxes payable in 2004, 2005 and 2006 is as follows: 2004 2005 2006 Market value $447,871,200 $499,070,200 $539,357,200 Tax capacity values: Real estate $6,363,354 $6,840,470 $7,401,828 Personal property 82,573 78,460 84,133 Subtotal 6,445,927 6,918,930 7,485,961 Fiscal disparity contribution (798,048) (954,578) (1,037,753) Fiscal disparity distribution 313,675 341,985 395,515 Total $5,961,554 $6,306,337 $6,843,723 Tax capacity rates 34.382 36.488 38.377 Tax levy $2,054,070 $2,293,825 $2,474,455 � values City o f . P H Minnes Audit Management Letter Analysis of Selected Accounts A schedule of tax capacity by classification is as follows: CITY OF OAK PARKS HEIGHTS 2006 2005 Percent of Percent of Amount City Total Amount City Total Real estate: Agricultural $21,284 0.3% Seasonal 2,803 0.0% Residential homestead 2,188,765 31.6% Residential nonhomestead 719,161 10.4% Commercial /industrial Infarn�ati€in Not A ailabi :' 2,526,858 36.5% Public utility 1,378,249 19.9% Railroad 3,360 0.0 %n Total real estate 6,840,480 98.9% Personal property 78,460 1.1% Total tax capacity $6,91 8,940 100.0% Tax Capacity by Property Class - 2005 Public Utility 19.9 Agricultural 0.3% Residential Homestead 31.6% Commercial/Industrial 36-5% Residential Nonhomestead 10.4" City of O ak Park Heights, Minnesota Audit Management Letter Analysis of Selected Accounts Ponds Payable The City had two bond issues outstanding at December 31, 2005. A summary of the 2005 activity of each bond issue is as follows: General General General Obligation Obligation Obligation Improvement Refunding Refunding Bonds Bonds Bonds of 1998 of 2001 of 2002 Totals Balance - January 1, 2005 $1,125,000 $110,000 $225,000 $1,460,000 Bonds issued - - - - Principal payments (125,000) (110,000) (160,000) (395,000) Balance - December 31, 2005 $1,000,000 $0 $65,000 $1,065,000 Maturity date 12/1/2013 - 12/1/2006 Repayment source Special assessments Connection charges and connection charges 0 City of . Park Heights, Minnesota Audit Management Letter General Fund GENERAL FUND The General Fund of the City is maintained to account for expenditures common to all cities (general government, public safety, public works, and parks and recreation). A history of major revenue sources that support the General Fund are as follows: Property Taxes State Aids All Other Total Revenue Year Amount Percent Amount Percent Amount Percent Amount Percent 1995 $1,354,677 68% $124,860 6% $520,466 26% $2,000,003 100% 1996 1,390,443 66% 119,274 6% 581,850 28% 2,091,567 100% 1997 1,387,227 65% 137,951 6% 619,874 29% 2,145,052 100% 1998 1,479,490 69% 133,484 6% 529,143 25% 2,142,117 100% 1999 1,333,194 62% 139,875 7% 674,762 31% 2,147,831 100% 2000 1,405,002 62% 145,514 6% 712,026 32% 2,262,542 100% 2001 1,524,300 66% 142,292 6% 631,284 28% 2,297,876 100% 2002 1,748,634 71% 160,381 6% 566,938 23% 2,475,953 100% 2003 1,859,203 71% 60,410 2% 706,210 27% 2,625,823 100% 2004 1,910,848 72% 61,479 2% 671,683 26% 2,644,010 100% 2005 2,218,213 71% 78,137 3% 819,616 26% 3,115,966 100% 2006% 2,406,808 82% 95,938 3% 425,035 15% 2,927,781 100% *Budgeted Major Revenue Sources - 2005 State { Aids 3% Other 26% Property Taxes 71 % City of . Park Heights, Minnesota Audit Management Letter General Fund A graph of property taxes, state aids, and other revenue for the General Fund is as follows: $2.600.000 - -- - $2.400,000 General Fund Revenue Source $2.200,000 - - $2,000,000 - - - - - " -- -- $1,800.000 - - - - - -- _.___ _ -. $1.600,000 - - n;ds $1.400.000 nn ocner -- - - - - -X- Property Taxes $1,200.000 --- $1,000,000 -- -- -- - --- $800.000 - -- -- $600.00(1 - - - - -- - -- -- $400,000 - - - -- -_. -- --__ $200,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20116% State Aids State aids of the General Fund have consisted of the following for the past six years (with 2006 budget): 2006 State Aid 2000 2001 2002 2003 2004 2005 Budget H.A.C.A. $79,583 $79,603 $ - $ $ $ Market value homestead credit - - 97,935 - - LGA 4,878 4,878 4,881 27,798 Local performance aid - - - - - - - Police aid 57,013 53,650 55,525 58,370 58,419 61,097 58,100 Other state revenue 4,040 4,161 2,040 2,040 3,060 17,040 10,040 Totals $145,514 $142,292 $160,381 $60,410 $61,479 $78,137 $95,938 Change ($3,222) $18,089 ($99,971) $1,069 $16,658 $17,801 7o Change (2%) 13% (62 %) 1 1 7o 27 %n 23% City of . Park Heights, Minnesota Audit Management Letter General Fund Other General Fund Revenue Other revenue of the General Fund has consisted of the following for the past five years (with 2006 budget): 2006 Description 2001 2002 2003 2004 2005 Budget Licenses and permits $213,651 $183,596 $313,273 $304,594 $365,512 $172,340 Charges for services: Refuse charge - Junker settlement 28,422 28,460 52 - - - Enterprise 95,300 89,780 87,205 90,860 94,140 64,465 Tax increment administration fee 452 - - - _ - Conshuction /engineering fee 2,083 14,613 - 5,859 Other 30,097 23,706 18,455 8,929 31,251 10,000 Inspections 43,047 44,064 88,751 50,337 84,719 - Fines and forfeits 63,655 63,211 61,146 78,274 69,850 62,000 Earnings on investments 48,559 32,052 32,067 39,188 55,431 47,270 Other 108,101 99,986 90,648 99,501 112,854 68,960 Total $631,284 $566,938 $706,210 $671,683 $819,616 $425,035 Administrative Fee - Enterprise The administrative fee is designed to reimburse the General Fund for overhead costs only. Beginning in 2006, the overhead was reduced from 10% to 7 %. Additionally, beginning in 2006 the Sanitation Fund will not be charged an administrative fee. City of . Park Heights Minnesota Audit Management Letter General Fund Administrative Fee m Capital Projects The City's General Fund incurs costs related to capital improvement projects. These costs include staff time, supplies, and other overhead items. The City established a F/2% administrative fee to recover these costs effective January 1, 1999. The administrative fee is charged to a project with the corresponding revenue receipted in the General Fund. The fee is charged at project inception and is based on the contract awarded. During 2004 there were no administrative fees charged to individual projects. Budget Versus Actual Comparison The General Fund balance increased by $256,135 as the result of positive budget variances primarily relating to revenue as follows: Bud e t Actual Variance Revenue $2,839,213 $3,115,966 $276,753 Expenditures /transfers out 2,842,210 2,859,831 (17,621) Increase (decrease) in fund balance ($2,997) $256,135 $259,132 0 City of O ak Park Heights, Minnesota Audit Management Letter General Fund The following schedule presents the change in fund balance on a budget variance basis. 2005 Favorable (Unfavorable) 2006 Budget Actual Variance Budget Revenue: General property taxes: Current and delinquent $2,205,325 $2,198,452 ($6,873) $2,388,808 Payment in lieu of taxes 15,000 19,761 4,761 18,000 Total general property taxes 2,220,325 2,218,213 (2,112) 2,406,808 Intergovernmental 109,378 101,519 (7,859) 96,898 Licenses and permits 197,605 365,512 167,907 172,340 Charges for services 146,620 215,969 69,349 74,465 Fines and forfeits 66,000 69,850 3,850 62,000 Earnings on investments 31,000 55,431 24,431 47,270 Refunds and reimbursements 65,785 85,305 19,520 68,000 Donations and contributions 2,500 3,000 500 - Other - 1,167 1,167 - Total revenue 2,839,213 3,115,966 276,753 2,927,781 City of Oak Park Heights, Minnesota Audit Management Letter General Fund 2005 Favorable (Unfavorable) 2006 Budget Actual Variance Budget Expenditures: General government: Mayor and council $82,240 $52,000 $30,240 $67,865 City administration 185,675 191,981 (6,306) 202,945 Legal 30,000 17,447 12,553 30,000 General management and building 73,600 64,659 8,941 74,300 Elections 340 3,284 (2,944) 6,800 Finance 165,980 164,266 1,714 173,325 Computer system 21,000 17,322 3,678 22,000 Audit 15,000 10,742 4,258 15,900 Insurance 262,025 271,820 (9,795) 300,935 Assessing 19,100 18,126 974 19,100 Planning and zoning 58,800 26,791 32,009 58,800 Engineering 27,000 5,843 21,157 27,000 General contingency 10,000 6,652 3,348 10,000 Total general government 950,760 850,933 99,827 1,008,970 Public safety: Police department 928,285 896,759 31,526 954,415 Building inspections 144,925 142,456 2,469 120,215 Fire protection 122,490 119,990 2,500 125,492 Civil defense 5,150 94 5,056 5,100 Animal control 1,900 738 1,162 1,900 Capital outlay 21,000 21,000 - - Total public safety 1,223,750 1,181,037 42,713 1,207,122 Public works: Street maintenance 40,350 34,733 5,617 47,895 Snow removal 87,100 63,476 23,624 86,500 Street lighting 52,000 49,492 2,508 55,450 Arborist 10,665 10,475 190 35,530 "free removal and planting 19,765 19,575 190 Total public works 209,880 177,751 32,129 225,375 Recreation: Parks, playgrounds and rinks 116,940 99,980 16,960 127,625 Total expenditures 2,501,330 2,309,701 191,629 2,569,092 Revenue over expenditures 337,883 806,265 468,382 358,689 Other financing sources (uses): Transfers to Debt Service Fund (61,380) (8,640) 52,740 - Transfers to Capital Project Fund (191,000) (452,990) (261,990) (270,180) Transfers to Enterprise Fund (88,500) (88,500) (88,500) Total other financing sources (uses) (340,880) (550,130) (209,250) (358,680) Net increase (decrease) in fund balance ($2,997) $256,135 $259,132 $9 City of O ak Park Heights, Minnesota Audit Management Letter General Fund General Fund — Long Term Commitments During 1996, the City approved a pledge of $200,000 to the St. Croix Sport Facility Commission. A summary of the activity related to this pledge is as follows: Year Payments Balance Beginning balance $200,000 1998 $50,000 150,000 1999 15,000 135,000 2000 15,000 120,000 2001 15,000 105,000 2002 15,000 90,000 2003 15,000 75,000 2004 15,000 75,000 2005 15,000 60,000 The remaining amount will be paid in annual installments of $15,000. City o f . P H Minnes Audit Management Letter General Fund General Fund Reserves The fund balance of the General Fund increased in 2005. The schedule below reflects the General Fund balance for the past ten years: Year Ended Fund Increase December 31, Balance (Decrease) 1996 $1,312,593 1997 1,246,347 (66,246) 1998 1,186,663 (59,684) 1999 1,191,081 4,418 2000 1,280,101 89,020 2001 1,173,118 (106,983) 2002 1,329,229 156,111 2003 1,694,611 365,382 2004 1,847,608 152,997 2005 2,103,743 256,135 Fund Balance $2,200,000 -- - $2,000,000 - - $1,800,000 $1,600,000 - —®— Actual Fund Balance $1,400,000 - - ' — L— Desired Fun Balance $1,200,000 - $1,000,000 - $800,000 $600,000 �� - -�- 1997 1998 1999 2000 2001 2002 2003 2004 2005 11 Ok- o f O P H Minnes Audit Management Letter General Fund Reserve balances are an important component of City financial management. When evaluating the adequacy of reserve balances, there are a number of important factors that must be considered. Several areas to consider are illustrated as follows: z ,�� \� . 3 n�, 3 . - 1 � �� ✓s s, 1�.� n ��, a'�l s� - ' S r - , v cti� - i�l�R rsr„�`.._a�i3. ;;ky: >F°+i' ,T✓'"'hr: ,�a,"�' �`�r�.C. �'F''� �'� 3. €; �? r�i , ✓aPl �� a ��, E g ? 3 ,✓ ..::y �i'i '� .l�a`a�`.�� c .. -t ��Y.�,f""?%'3.. o�3k��o�� v� <a�'sN.,.�''`ys :f f ✓��° ', ��\�4; � �y � "�, �' r � ; � `, .,. � � ..,,>i✓% &cam +r'' �� ::�� /li -� � z � � .� a �o-�� F�., z ��1�� "''� ° ��. t .��`'�x�t. / 9F�F Y*h�c�� c��i_ `� ?x^ z� /,� �ti��Z�i�yL�2a \3 \1�� iJ ✓ �� ' ��.�� ....,� � � '*rr��;,;�> ,, a� �\•,�sj Supplements revenues y'��, �F" \�s \ \��ti� \ s s indicator li'✓ - with investment income `�i, y ��`� ., ..� �� ..« =. y a 3i �, s r :, � ` c ��7 ,`5`'� ` , �_, rte': `wF ��P �,� i ,`\ �y'y �i?� � y ��'�� . .• g ,s, z \`��`� Capital Outlay `�� `\ \�`�$\`v � � .v�✓ ,!`3F�s^ Lc `� � k�a�'� �� y' /9' Revenue Cutbacks Y �t _ y r � �� c�,.. Fe lacement \ � ✓ n '� " � �, � z� "� �' � Provides resources for ` �e.��' :� � A Avoids temporary ,a �a ✓ Jeri �� ^� � `�/ � � /3t'r>' � L ?� � �� n � minor roor � �� ^" overdrafts prior to ma _ V �' J �` < ' � �`��z �h Y ✓ ��, h 1'� c feasibiI iects or re oris receipts I tY P � � s Provides the City Avoids overburdening realer o .r g pli x�z of annual budgets �= ax ons to deal � �-✓� ets for Unan Expenditures ticipated ,,� �j �✓ J� _ 5 s��''� Special F with unexpected events ,� Jgn' '� �O ` certain capital outlay �t Nc� �. Projects ;�_ � �Y3��w`i ✓ S�'U,m, �, 1 ..,.��k anr:>. ��`..�,�� „��; -r )a E a`. �h`°�a� �A��' #"'t °C,��lS�>+,. / ✓j Yr' �C`y \� .�• .y�,,, .. . City of Oak Park Heights, Minnesota Audit Management Letter General Fund In 1987, the City adopted Resolution 87 -10 -42 establishing General Fund reserves/ designations for cash flow, employee benefits and general contingency based upon formulas for each category. The formula for the designation for contingent employee benefits was amended by the City Council on December 11, 2001. At December 31, 2004 and 2005, the General Fund balance was reserved or designated as follows: General Fund Balance December 31, 2004 2005 Designated for: Cash flow $1,147,000 $1,237,000 Contingent employee benefits 133,961 141,533 General contingency 419,000 439,000 Subtotal - designated 1,699,961 1,817,533 Undesignated 147,647 286,210 Total fund balance $1,847,608 $2,103,743 City of Oak Park Heights, Minnesota Audit Management Letter General Fund Cash Flow Reserve Property taxes and related state aids account for approximately 75% of the revenue of the General Fund. Property taxes and local government aid are not received until July and December of each year (i.e., the second half of the year). Market value homestead credit is not received until October and December of each year. As a result, the City is required to have sufficient reserves at the beginning of the year to fund operations of the first half of the year. For the City of Oak Park Heights, the recommended cash flow reserve is $1,237,000, computed as follows: Cash Flow Reserve 2006 tax levy (includes market value homestead credit aid) $2,474,455 Recommended reserve (one -half of tax levy and state aids) $1,237,000 • Audit Management Letter General Fund The following graph of monthly General Fund cash balances illustrates the impact of receiving property taxes and state aids in the second half of the year: $2200,000 General Fund Monthly Cash Balances -- $2,000,000 --- -- -- ill $1.81 0,000 - I $L600.000 - - — —- -- $1,400000 $829,000 du reuse $1.200.000 $1,0011,000 $800,000 $400,000 - - $200.000 - - -- - -- -- -- -- �'y 12/31/2004 1/31/2005 2/28/2005 3/31/2005 4/30/2005 5/312005 6130 12005 7131/2005 8/31/2005 9/302005 10/312005 11/302005 12/31/2005 ®Sw9csi $1,798,853 .$1,703,299 $1,556,982 $1,404,456 $1,359,348 $1, 257,668 %969,273 $1,996,316 $1,841,934 51,788,572 51 ,653,051 $1,548,126 $2,035, As shown above, the cash balance decreased $829,000 between January 1 and June 30, illustrating the need for the cash flow reserve. We recommend the City continue to monitor the cash flow needs of the General Fund. City of . Park Heights, Minnesota Audit Management Letter General Fund Contingent Employee Benefit Reserve The employee benefits reserve is computed based upon accrued, but unpaid, employee benefits as follows: Employee Benefits Reserve December 31, Employee Benefit 2004 2005 Vacation leave carryover $24,949 $24,713 Severance 109,012 116,820 Total $133,961 $141,533 This reserve was established to recognize the actual /potential liability for vacation and sick leave. When the reserve was established, a conservative approach was taken in which an amount equal to all vacation leave, all severance and twenty -five percent of the sick leave balance was deemed the appropriate reserve amount. History had shown that this level of reserve is not required. The City amended this reserve component to an amount equal to 50% of vacation leave, 100% of severance and 0% of sick leave. City of . Park Heights, Minnesota Audit Management Letter General Fund General Continency Reserve The amount of General Fund reserve required to meet emergency and /or unanticipated expenditures is not readily quantifiable. Rather, the level of this requirement must be established by the City based on the history of the City and the philosophy of "adequate" reserve coverage. Currently, the City of Oak Park Heights has set this reserve equal to 15% of the General Fund operating budget subject to availability of such amounts, as follows: General Contingency Reserve December 31, Description 2004 2005 Ensuing year's budget $2,793,275 $2,927,772 Reserve amount @ 15% $419,000 $439,000 City of Oak Park Heights, Minnesota Audit Management Letter Special Revenue Funds SPECIAL REVENUE FUNDS Special Revenue Funds are a classification of funds to account for revenues (and expenditures related thereto) segregated by City policy, Federal or State statutes for specific purposes. The City maintained two Special Revenue Funds during 2005. Forfeiture and Seizure Fund This fund was established in 1991 to account for property forfeited pursuant to MS 609.531. A summary of the financial activity of this fund from inception is as follows: Prior Years 2005 Total Revenue: Intergovernmental - bulletproof vests $7,170 $ - $7,170 Earnings on investments 7,822 842 8,664 Reimbursements 4,029 - 4,029 Confiscated property 94,538 5,200 99,738 Sale of municipal property 5,046 - 5,046 Total revenue $118,605 $6,042 124,647 Expenditures: Public safety: Materials and supplies $27,130 $6,448 33,578 Contractual services 6,060 6,318 12,378 Capital outlay 56,572 - 56,572 Total expenditures $89,762 $12,766 102,528 Fund balance - December 31, 2005 $22,119 The use of these funds is restricted by MS 609.531 subd. 5 to "supplement the agency's operating fund or similar fund for use in law enforcement." City of O ak Park Heights, 'Minnesota Audit Management Letter Special Revenue Funds Economic Development Fund This fund was established in 1998 to account for the activity of the Oak Park Heights Economic Development Authority. A summary of the financial activity of this fund is as follows: Prior Years 2005 Total Revenue: Earnings on investments $22,206 $1,782 $23,988 Interfund loan interest 1,113 - 1,113 Refunds and reimbursements 2,531 - 2,531 Sale of municipal property 76 - 76 Transfer from Capital Revolving Fund 260,000 - 260,000 Total revenue $285,926 $1,782 287,708 Expenditures: Community development: Materials and supplies $457 $ - 457 Contractual services 30,532 504 31,036 Interfund loan interest 70,000 - 70,000 Capital outlay 121,500 - 121,500 Transfer to Capital Revolving Fund 1 1,113 - 11,113 Total expenditures $233,602 $504 234,106 Fund balance - December 31, 2005 $53,602 During 1998, the City purchased the Bell property and demolished the building in 1999. The fund deficit was funded by a $260,000 interfund loan from the Capital Revolving Fund. This fund did not have the resources to repay the interfund loan. Therefore, the interfund loan was forgiven. If a sale of the Bell property occurs, the proceeds should be receipted in the Capital Revolving Fund. City of Oak Park Heights, • Audit Management Letter Debt Service Funds DEBT SERVICE FUNDS The financial statements for the Debt Service Funds are presented in Statements 15 and 16 of the 2005 Annual Financial Report. Debt Service Funds are a type of governmental fund to account for the accumulation of resources for the payment of interest and principal on debt (other than Enterprise Fund debt). The City maintained three Debt Service Funds during 2005 as follows: Fund Balance December 31, Increase Fund 2004 2005 (Decrease) G.O. Crossover Refunding Bonds of 1993 / Refunding Bonds of 2002 $267,018 $109,707 ($157,311) G.O. Improvement Bonds of 1995/Refunding Bonds of 2001 74,532 - (74,532) G.O. Improvement Bonds of 1998 113,144 105,076 (8,068) Totals $454,694 $214,783 ($239,911) Refunding Bonds of 2002 The Water and Sewer Revenue Bonds of 1991/1993/2002 were issued to provide financing for Phase I of the City's Annexation Area Extended (A.A.E.) Trunk facility improvements. The City established special area connection charges to provide for the retirement of these bonds and for financing additional trunk facilities in this area. City of O ak Park Heights, Minnesota Audit Management Letter Debt Service Funds A projection of cash flow of the Water and Sewer Refunding Bonds of 1993 / Refunding Bonds of 2002 is as follows: City of Oak Park Heights, Minnesota Projection of Cashflow Water and Sewer Refunding Bonds of 2002 Total Cash Balance Property Special Investment Projected Debt Other Cash Balance Year January I Taxes Assessments Transfers Interest Receipts Payments Disbursement December 31 2006 $109,707 $ - $ - $ - $1,037 $1,037 $66,722 $ - $44,022 Total $0 $0 $0 $1,037 $1,037 $66,722 $0 Assumptions Special assessment collection rate .................... 95% Property tax collection rate . ............................... 99% Investment interest rate ..... ............................... 1.00% Ne ative interest char ed to funds?. no As shown above, this fund is projected to have a surplus of $44,000 at final bond maturity in 2006. • Audit Management Letter Debt Service Funds G.O. Improvement Bonds of 1998 This bond was issued in 1998 to provide financing for Kern Center and Phase Three of the 58 Street improvement. This bond is scheduled to be repaid by special assessments and connection charges. A projection of cash flow of the Improvement Bonds of 1998 is as follows: City of Oak Park Heights, Minnesota Projection of Cashflow General Obligation Improvement Bonds or 1998 Total Cash Balance Property Special Other Investment Projected Debt Other Cash Balance Year January I Taxes Assessments Receipts Interest Receipts Payments Disbursement December 31 2005 $102,554 $ $103,555 $55,000 $1,083 $159,638 $167,813 $ $94,379 2006 94,379 99,521 50,000 1,004 150,525 162,687 82,217 2007 82,217 95,486 50,000 890 146,376 157,500 71,093 2008 71,093 91,451 50,000 786 142,237 152,250 61,081 2009 61,081 87,417 50,000 694 138,111 146,938 52,254 2010 52,254 83,382 45,000 609 128,991 141,562 39,683 2011 39,683 79,348 50,000 496 129,844 136,125 33,401 2012 33,401 75,313 30,000 424 105,737 130,625 8,513 2013 8,513 71,278 - 263 71,541 - 80,055 Total $0 $786,752 $380,000 $6,249 $1,173,001 $1,195,500 $0 Assum tions Special assessment collection rate .................... 9510 Property tax collection rate . ............................... 99% Investment interest rate ..... ............................... 1.00% Negative interest charged to funds ? .................. no As shown above, this Debt Service Fund will require connection charge revenue to finance the debt service. - -. City of . Park Heights, Minnesota Audit Management Letter Capital Project Funds CAPITAL PROJECT FUNDS The fund balance (deficits) of the Capital Project Funds were as follows at December 31, 2004 and 2005: December 31, Increase Fund 2004 2005 (Decrease) Capital Revolving $365,080 $458,382 $93,302 Budgeted Projects and Equipment Revolving 396,079 733,219 337,140 Park Development 324,075 358,719 34,644 Street Reconstruction 405,774 510,826 105,052 Renewal and Replacement 2,407,576 2,645,595 238,019 Brekke Park Memorial 229 237 8 Water Tower Rental 8,349 31,942 23,593 McKean Square - - - Boutwells Landing - Novak Avenue Street and Utility Improvements - - - Sanitary Sewer Connection 393,247 396,939 3,692 Water Connection 216,035 241,754 25,719 Storm Sewer Connection 865,290 730,295 (134,995) Totals $5,381,734 $6,107,908 $726,174 City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds Capital Revolving Fund During 1984, the City established the Capital Revolving Fund (formerly Closed Bond Fund). Initial financing for this fund was provided through the residual balances of closed (or defeased) special assessment Debt Service Funds of the City. A summary of transactions for 2004 and 2005 is as follows: Capital Revolving Fund Description 2004 2005 Financial resources: Special assessments $114,503 $44,342 Earnings on investments 11,490 13,359 Transfers from General Fund - 52,740 Total financial resources 125,993 110,441 Financial uses: Materials and supplies - 35 Contractual services 22,346 15,020 Lighting and pathway project 162,196 2,084 Total financial uses 184,542 17,139 Increase (decrease) in fund balance (58,549) 93,302 Fund balance - January 1 423,629 365,080 Fund balance - December 31 $365,080 $458,382 The lighting and pathway project was assessed in 2004. The assessment will be collected over a period of three years. City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds Budgeted Projects and Equipment Revolving Fund The Budgeted Projects and Equipment Revolving Fund (formerly Capital Improvements Fund) was established in 1978 to account for monies set aside for various capital improvements. This fund is budgeted annually by the City Council in conjunction with the City's budget process. As part of such process, the City allocates the monies in this fund to specific projects and /or programs. Such allocation /designations were as follows at December 31, 2005: Balance Balance Purpose 12/31/2004 Revenues Expenditures 12/31/2005 Sealcoat/crack seal $76,351 $75,000 $ $151,351 Outdoor storage 15,000 20,000 35,000 Municipal building - 20,000 - 20,000 Recreation: Park building 100,000 - 100,000 Other 42,074 68,000 - 110,074 Computers 48,618 32,500 - 81,118 Vehicles: Police 9,041 15,000 - 24,041 Public works 27,379 15,900 43,279 Furniture and equipment: Community and development 365 - 365 Building inspections 500 - - 500 Police 875 750 - 1,625 Streets 200 - - 200 Trees 57,062 100 (4,456) 52,706 Police radio equipment - 29,000 - 29,000 Comprehensive plan - 28,750 - 28,750 Coalition of utility cities - 16,000 - 16,000 Civil defense - 5,000 - 5,000 Unallocated 18,614 15,596 - 34,210 Totals $396,079 $341,596 ($4,456) $733,219 1 City of O ak Park Heights, Minnesota Audit Management Letter Capital Project Funds Park Development This fund was established by Resolution 88 -12 -33 to account for the development of the City's parks and recreational areas. The fund balance was $358,719 at December 31, 2005, as follows: Prior Years 2005 Total Financing sources: Park fees $342,400 $22,952 $365,352 Earnings on investments 160,781 11,692 172,473 Donations and contributions 4,937 - 4,937 Total financing sources $508,118 $34,644 542,762 Financing uses: Professional services $28,533 $ - 28,533 Park signs 15,902 - 15,902 Valley View Park bridge 65,616 - 65,616 Trail paving 29,794 - 29,794 Playground equipment /benches 44,198 - 44,198 Total financing uses $184,043 $0 184,043 Fund balance - December 31, 2005 $358,719 City of . Park Heights, Minnesota Audit Management Letter Capital Project Funds Street Reconstruction This fund was established to account for the first phase of the street reconstruction program. A summary of financial activity is as follows: Prior Years 2005 Total Financial resources: Bond proceeds $1,062,456 $ - $1,062,456 Earnings on investments 142,517 14,986 157,503 Refunds and reimbursements 10,000 - 10,000 Transfers in: General Fund 12,011 100,000 112,011 St. Croix Mall TIF 145,800 - 145,800 Budgeted projects and equipment revolving 352,718 - 352,718 Renewal and replacement 15,854 - 15,854 Total financial resources $1,741,356 $114,986 1,856,342 Financial uses: Project costs $1,327,916 $9,934 1,337,850 Residual equity transfer (7,666) Fund balance - December 31, 2005 $510,826 Audit Management Letter Capital Project Funds Renewal and Replacement This fund was established in 1994 for the purpose of creating a reserve balance for partial financing of future costs to renew and /or replace existing utility systems. This partial financing will be required as these systems are replaced because it is anticipated the City will be unable to assess 100% of such replacements. Initial funding was provided by a transfer of $574,378 from the Water and Sewer Utility Fund. This transfer represented depreciation charges accumulated since 1969. Annually thereafter, additional transfers equal to depreciation on contributed assets are to be transferred. A summary of the financial activity from inception is as follows: Prior Years 2005 Total Financial sources: Transfer from water and sewer utility: Initial (1994) $574,378 $ - $574,378 Annual 1,305,968 155,198 1,461,166 Earnings on investments 677,801 82,821 760,622 Total financial sources $2,558,147 $238,019 2,796,166 Financial uses: Well No. I maintenance $43,266 $ - 43,266 Flouride system 1,581 - 1,581 Lift station repair 29,142 - 29,142 Other 599 - 599 Transfer out: Deep Well #3 60,129 - 60,129 Street reconstruction 15,854 - 15,854 Total financial uses $150,571 $0 150,571 Fund balance - December 31, 2005 $2,645,595 City of • Park He • Minnesota Audit Management Letter Capital Project Funds Brekke Park Memorial This fund was established in 1999 to account for the donations received for Brekke Park. The fund balance was $237 at December 31, 2005. Sanitary Sewer Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: Prior Years 2005 Total Revenue: Special assessments $35,677 $8,618 $44,295 Earnings on investments 133,529 13,635 147,164 Connection charges: River Hills 1st and 2nd 39,725 - 39,725 Highway 36 10,551 10,551 Wal -Mart 38,751 38,751 ISD #834 201,373 201,373 Brackey 53,311 53,311 Brackey West - Oak Park Pond 45,461 45,461 Brackey West - Outlots A & B 16,161 16,161 Autumn Ridge 1st, 2nd and 3rd 65,547 65,547 Haase addition 3,186 3,186 Valley Senior Service Alliance 224,352 224,352 Kern Center 68,474 68,474 Hom 4 Me Corp. 2,293 2,293 Commercial Partners (Kohls) 64,155 - 64,155 Other 14,690 6,689 21,379 Total revenue $1,017,236 $28,942 1,046,178 Expenditures: Transfer to debt service $361,325 $25,250 386,575 Kern Center 20,200 - 20,200 School District improvements 160,000 160,000 River Hills 1st 30,942 30,942 60th Street sanitary sewer 51,522 - 51,522 Total expenditures $623,989 $25,250 649,239 Fund balance - December 31, 2005 $396,939 City of . Park Heights, Minnesota Audit Management Letter Capital Project Funds Water Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: Prior Years 2005 Total Revenue: Special assessments $62,017 $15,001 $77,018 Earnings on investments 133,851 7,831 141,682 Connection charges: River Hills 1 st and 2nd 64,798 - 64,798 Highway 36 18,352 - 18,352 Wal -Mart 67,088 - 67,088 ISD #834 405,341 - 405,341 Brackey 162,444 - 162,444 Brackey West - Oak Park Pond 96,509 - 96,509 Brackey West - Outlots A & B 10,506 - 10,506 Autumn Ridge 1st, 2nd and 3rd 103,372 - 103,372 Haase addition 5,542 - 5,542 Valley Senior Service Alliance 360,203 - 360,203 Kern Center 119,173 - 119,173 Hom 4 Me Corp. 3,990 - 3,990 Commercial Partners (Kohls) 111,625 - 111,625 Other 25,538 11,637 37,175 Total revenue $1,750,349 $34,469 1,784,818 Expenditures: Transfer to debt service $1,324,375 $8,750 1,333,125 School District improvements 145,000 - 145,000 River Hills 1st 29,739 - 29,739 Kern Center 35,200 - 35,200 Total expenditures $1,534,314 $8,750 1,543,064 Fund balance - December 31, 2005 $241,754 Audit Management Letter Capital Project Funds Storm Sewer Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: Prior Years 2005 Total Revenue: Special assessments $78,567 $18,986 $97,553 Earnings on investments 205,469 26,006 231,475 Connection charges: River Hills 1st and 2nd 50,411 - 50,411 Highway 36 23,253 23,253 Wal -Mart 68,511 - 68,511 ISD #834 289,348 289,348 Brackey 117,511 117,511 Brackey West - Oak Park Pond 122,262 122,262 Brackey West - Outlots A & B 13,310 13,310 Autumn Ridge 1st, 2nd and 3rd 124,046 124,046 Haase addition 7,021 7,021 Valley Senior Service Alliance 491,883 491,883 Kern Center 150,896 150,896 Hom 4 Me Corp. 5,057 5,057 Commercial Partners (Kohls) 191,470 - 191,470 Other 34,374 54,734 89,108 Total revenue $1,973,389 $99,726 2,073,115 Expenditures: Transfer to Revolving Capital Fund $270,000 $ - 270,000 Transfer to Debt Service Fund 84,800 16,000 100,800 Long Lake storm sewer 27,820 - 27,820 Kern Center 44,600 - 44,600 Kern Center pond expansion 92,581 218,721 311,302 Wal -Mart 41,232 - 41,232 Storm drainage report 9,910 9,910 River Hills 1st 13,757 13,757 Valley Point 2nd 17,211 17,211 School district improvement 289,348 289,348 Brackey addition 99,340 99,340 AUAR fees 117,500 117,500 Total expenditures $1,108,099 $234,721 1,342,820 Fund balance - December 31, 2005 $730,295 City of O ak Park Heights, Audit Management Letter Capital Project Funds This fund is committed for future debt service payments on the Bonds of 1998. Such future commitments (cash transfer) are as follows: Future Transfers to 1998 Bond Debt Service Fund Sanitary Water Storm Year Sewer Works Sewer Total 2006 $27,775 $9,625 $17,600 $55,000 2007 25,250 8,750 16,000 50,000 2008 25,250 8,750 16,000 50,000 2009 25,250 8,750 16,000 50,000 2010 25,250 8,750 16,000 50,000 2011 22,725 7,875 14,400 45,000 2012 25,250 8,750 16,000 50,000 2013 15,150 5,250 9,600 30,000 Total $191,900 $66,500 $121,600 $380,000 Based on City estimates, the Connection Charge Funds are scheduled to receive the following future connection charges as development occurs: Estimated Future Connection Charges Sanitary Water Storm Sewer Works Water Total Wal -mart $19,029 $33,106 $ - $52,135 Kern Center 110,315 191,835 242,910 545,060 Oakgreen Village (Phase I and II) 92,610 161,120 203,990 457,720 CSM/Lowes 66,312 115,363 40,103 221,778 Pine Grove Gardens 11,320 19,694 24,935 55,949 Total $299,586 $521,118 $511,938 $1,332,642 • Key. • • Audit Management Letter Capital Project Funds An analysis of the commitments of the connection charge funds is as follows: Sanitary Water Storm Sewer Works Water Total Fund balance - December 31, 2005 $396,939 $241,754 $730,295 $1,368,988 Future connection charges (est.) 299,586 521,118 511,938 1,332,642 Subtotal 696,525 762,872 1,242,233 2,701,630 Debt service commitments: Bonds of 1998 (191,900) (66,500) (121,600) (380,000) Subtotal 504,625 696,372 1,120,633 2,321,630 Available for new well - (696,372) - (696,372) Uncommitted $504,625 $0 $1,120,633 $1,625,258 As shown above, connection charges should be sufficient to fund the debt service requirement. of Oak Park Heights, • Audit Management Letter Enterprise Funds ENTERPRISE FUNDS The enterprise fund accounts for four operations - water, sanitary sewer, storm sewer and sanitation. Presented below is history of change in net assets by activity. Change in Net Assets by Year Sanitary Storm Year Water Sewer Sanitation Sewer Total 2005 $226,051 $326,221 $20,804 $39,279 $612,355 2004 13,895 12,665 18,151 26,496 71,207 2003 117,821 87,935 5,457 36,789 248,002 2002 41,573 81,542 3,955 5,794 132,864 2001 41,643 (5,994) (3,604) 5,875 37,920 2000 65,051 (80,152) (255) (4,765) (20,121) 1999 49,552 (111,811) (32,625) 12,279 (82,605) 1998 (31,669) (38,145) (25,637) - (95,451) 1997 11,294 50,550 - 61,844 1996 26,964 (6,551) - - 20,413 1995 54,581 (2,359) - - 52,222 1994 (302,719) (198,539) - - (501,258) 1993 73,349 40,156 - - 113,505 pre -1993 595,125 595,126 - - 1,190,251 Subtotal 982,511 750,644 (13,754) 121,747 1,841,148 Contributed capital - 111105 2,725,978 2,526,293 - - 5,252,271 Net assets - 12/31/05 3,708,489 3,276,937 (13,754) 121,747 7,093,419 • • • • , Audit Management Letter Enterprise Funds Water Utility Fund A chart of income from operations is as follows: $450,000 Water Operating $400,000 Revenue & Expense $350,000 -- — -- -- -- - $300,000 ------- ..__..._....._ - -_ -- -- Depreciation $250,000 M All Other Expenses tit ~ =Contractual Services $200,000 -- - -- - �� O Personal Services - �- -Operating Revenue $150,000 $100,000 — $50,000 - -- - - -- - - - -- 2000 2001 2002 2003 2004 2005 The City increased water rates effective January 1, 2003 and January 1, 2004. IgIlmig.-T Audit Management Letter Enterprise Funds Water Utility Fund A chart of income from operations for the Sewer Utility Fund is as follows: $800,000 Viewer $700,000 Operating Revenue & Expense $600,000 $500,000 - -- -- ..__.- .__... - -- - - -- Depreciation Personal Services $400,000 - -- - -- - . -- - -- =All Other Expenses D MCES $300,000 -A-- Operating Revenue $200,000 - -- -- - - -- $100,000 $0 2000 2001 2002 2003 2004 2005 The City revised sewer rates as follows: Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Effective Effective Effective Effective Etfective Effective Effective Type of Charge 01/01199 04/01/00 0I/Ol/O1 01101/02 01/01/03 01/01/04 01 /01 105 Water: Base fee $7.05 $7.50 $7.50 $7.50 $7.50 $7.50 $7.50 Chatge per 1,000 gallons 1 "or: Usage between 6,000 and 16.000 gallons $1.10 $1.17 $1.17 $1.17 $1.25 $1.34 $1.34 Usage between 17.000 and 33,000 gallons $1.38 $1.47 $1,47 $1.47 $1.57 $1.68 $1.76 Usage in excess of 33,000 gallons $1.65 $1.76 $1.76 $1.76 $1.88 $2.01 $2.11 Sewer: Base fee $11.55 $12.45 $13.20 $t4.00 $14.85 $15.70 $16.65 Charge per 1.000 gallons for usage in excess of 5,000 gallons $2.15 $2.32 $2.46 $2.61 $277 $3.00 $3.40 City of O ak Park Heights, Minnesota Audit Management Letter Enterprise Funds Sanitation Utility Fund The City began charging for refuse collection in 1988. Prior to 1998, this activity was accounted for in the General Fund. The City moved this activity to the Enterprise Funds during 1998. Refuse collection revenue as a percent of refuse collection expenditures/ expense is as follows: Refuse Transfer Refuse Collection Revenue as a from Net Collection Expenditures/ Net Percent of General Income Year Revenue Expenses Cost Expenditures Fund (Loss) General Fund: 1992 $66,076 $251,121 ($185,045) 26% $ $ - 1993 103,039 297,452 (194,413) 35% 1994 108,310 326,926 (218,616) 33% - 1995 110,021 334,053 (224,032) 33% - - 1996 103,444 326,036 (222,592) 32% - - 1997 87,830 298,842 (211,012) 29% - Enterprise Fund: 1998 93,014 309,051 (216,037) 30% 190,400 (25,637) 1999 71,585 169,210 (97,625) 42% 65,000 (32,625) 2000 87,434 175,164 (87,730) 50% 84,000 (3,730) 2001 97,575 184,179 (86,604) 53% 83,000 (3,604) 2002 98,030 182,575 (84,545) 54% 88,500 3,955 2003 97,970 181,013 (83,043) 54% 88,500 5,457 2004 96,909 167,258 (70,349) 58% 88,500 18,151 2005 96,876 164,572 (67,696) 59% 88,500 20,804 Audit Management Letter Enterprise Funds Storm Sewer Utility Fund The City created the stormwater utility during 1999. A monthly fee (effective October 1, 1999) was established at $1 per household and $10 per acre for commercial properties. The fee for vacant residential property is 50 cents per month and undeveloped commercial property is $1.50 an acre per month. A chart of income from operation is as follows: $80,0o0 - - — Storm Sewer Operating $70,000 -- -- ----- -- . — . — �� _._.._._.. ___._ Revenue & Expense $60,000 $50,000 - - - - -- All Other Expenses =Contractual Services $40,000 v vv� MPersonal Services — — OperatingRevenue $30,000 IN \ C � $20,000 $10,000 \�I b 2000 2001 2002 2003 2004 2005 9 Pin • 0 . � • • Audit Management Letter Internal Control INTERNAL C A separate internal control report has been issued in conjunction with the audit. The report cited one reportable condition. We noted other matters relating to internal control as follows: New Utility Accounts Currently the City does not have a strong system in place to monitor when a new utility account should be established. Possible additional procedures are: 1) Periodically have building inspections provide utility billing a list of building permits that include new water meters. This would most likely indicate the need to establish a new account. 2) Periodically have public works provide utility billing a list of water meters installed, with an indication whether the meter was placed on a new dwelling or whether the meter replaced an old meter. 3) Develop a master list of all water meters in the City and periodically compare this listing to the customers being billed for utilities. Improve IT Security It has come to our attention that passwords for both the network and the accounting software have been established, but there is no requirement for employees to change their passwords. Best Practices recommends an entity require employees to change their passwords periodically. We recommend the City consider this change, which would establish stronger controls over its electronic data. • Audit Management Letter Internal Control Storage of Back -Up Tapes We understand the back -up tapes for the accounting software are stored in the same area of City hall as the server for the accounting software. Best Practices recommends storing back -up tapes in a secure location, preferably off -site. We recommend the weekly back -up tape made on Friday be stored in the City's vault. Security The vault is used to safekeep the City's official records. Currently the vault door closes automatically, but the door does not lock automatically. We recommend the City consider options for securing the vault door, such as a combination keypad. City of O ak Park Heights, Minnesota Audit Management Letter Required Communications REQUIRED COMMUNICATIONS Our Responsibility under U.S. Generally Accepted Auditing Standards and OMB Circular A -133 As stated in our engagement letter dated August 12, 2005, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting principles. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. As part of our audit, we considered the internal control of the City of Oak Park Heights. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. Significant Accounting Policies Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Oak Park Heights, Minnesota are described in Note 1 to the financial statements. For 2005, the City of Oak Park Heights, Minnesota adopted GASB No. 40, related to cash and investments, which revised footnote disclosures. We noted no transactions entered into by the City of Oak Park Heights, Minnesota during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Ji all - • Audit Management Letter Required Communicatio Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the financial statements was management's estimate on depreciation expense. We evaluated the key factors and assumptions used to develop depreciation expense in determining that it is reasonable in relation to the financial statements taken as a whole. Audit Adjustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City of Oak Park Heights, Minnesota's financial reporting process (that is, cause future financial statements to be materially misstated). For 2005, there were four audit adjustments proposed by us that were posted by the City of Oak Park Heights, Minnesota. In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City of Oak Park Heights, Minnesota, either individually or in the aggregate, indicate matters that could have a significant effect on the City of Oak Park Heights, Minnesota's financial reporting process. City of . Park Heights, Minnesota Audit Management Letter Required Communications Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the government unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Issues Discussed Prior to Retention of Independent Auditors We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City of Oak Park Heights, Minnesota's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing our audit.