HomeMy WebLinkAboutManagement Report and Recommendations CITY OF OAK PARK HEIGHTS, MINNESOTA
MANAGEMENT REPORT AND RECOMMENDATIONS
DECEMBER 31, 1979
To the Honorable Mayor and
Members of the City Council
City of Oak Park Heights, Minnesota
We have completed our examination of your 1979 Annual Financial Report and
have issued our audit opinion 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 1979 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 recommen-
dations for improvements or enhancements to the financial accounting system of the
City.
1979 ANNUAL FINANCIAL REPORT
Current accounting and reporting standards for cities have changed considerably
over the past two years. These changes were brought about by a wide spread dissat
is with the consistancy and quality of financial reporting as applied to
cities. The National Council on Governmental Accounting (NCGA) issued NCGA State-
ment No. 1 which established these changes in accounting and reporting principles.
The State of Minnesota concurred with these changes and immediately passed
legislation requiring compliance with such principles. The quality of financial
reporting for Minnesota Cities has therefore been elevated. The single most
evident change is the requirement that the financial statements as presented in
the Annual Financial Report be on the accrual /modified accrual basis of accounting
as opposed to the previously acceptable cash basis,
City of Oak Park Heights
Management Report, Page 2
In order to comply with the imposed restated standards, most cities have
critically reviewed their internal accounting systems to determine if the amount
and quality of data required would be generated on a timely basis. Generally, most
cities have improved their internal accounting systems in response to the new report-
ing standards.
The City of Oak Park Heights, however, had not implemented substantial changes as
of this audit. Additionally, personnel changes made in 1978 has lessened the internal
accounting controls of the City. As a consequence, the City's internal accounting
records must be adjusted substantially to produce the Annual Financial Report of
the City. More important, the City does not have access to good monthly financial
reports, on a timely basis.
Changes to the City's internal accounting records are still in the development
stage. We recommend that the planned systems be given high priority and that these
systems be implemented at the earliest possible time. Our office is available to
assist the City, upon request.
COMBINED FINANCIAL STATEMENTS
The Combined Financial Statements of the City are presented in Statements 1
through 6 of the 1979 Annual Financial Report. The following comments relate to the
Combined Financial Statements of the City.
City of Oak Park Heights
Management Report, Page 3
CASH AND INVESTMENTS
DECEMBER 31, INCREASE
DESCRIPTION 1979 1978 (DECREASE)
Clerk's Balance;
Checking Account $ 257,585 $ 71,036 $186,549
Investments and Savings 1,238,134 1,268,711 (30,577)
With Paying Agents 5,937 482 5,455
Totals $1,501,656 $1,340,229, $161,427
The Clerk's Balance w Checking Account balance was $257,000 at December 31, 1979
and averaged over $160,000 for 1979. If invested, this money could have earned the
City an additional $5,000 to $10,000 for 1979. An investment program is needed to
minimize uninvested cash balances and,therefore, maximize interest earnings. Optimum
interest earnings are required to finance the various special assessment debt service
accounts of the City. We recommend that this program be developed and implemented
immediately.
Interest on investments totaled $125,000 for 1979 as compared to $68,000 for
1978. This increase was generally the result of more money available for investment
and increased interest yields.
SECURITY FOR DEPOSITS
Security for deposits pledged by the City's depositories are presented in Exhibit
4. Our analysis of collateral requirements and actual collateral pledged indicates
that all depositories had pledged sufficient collateral.
City of Oak Park Heights
Management Report, Page 4
DUE FROM OTHER FUNDS
The Statement of Inter Audit Adjustments (Exhibit 1) presents a detailed
explanation of cash transfers necessary to adjust the City's individual fund cash
balances at December 31, 1979. The following schedule summarizes these adjustments
by fund:
FUND DUE FROM DUE TO
DESCRIPTION NO. OTHER FUNDS OTHER FUNDS
General Fund 101 $ 70,663.32 $ 17,628.47
Special Revenue:
Revenue Sharing 201 26,000,00
Capital Projects:
Lawcon Grant 403 30,753.03 9,245.90
Special Assessment:
Bonds of 1967 and 1968 501 20,259.15
Bonds of 1971 502 543.94
Bonds of 1976 506 205.69 43,185.08
Bonds of 1977 509 40,085.00 24,421,15
Completed Construction 510 280.23
Bonds of 1978 and 1979 511 32,1i9.06 56,753.03
Prison Utilities 512 5,273.66
1979 Utilities 513 22,647.06 82,283.86
Enterprise:
Water Operating 701 18,081.00 22,285.87
Totals -- All Funds $261,357.25 $261,357.2,
Many of the above adjustments were necessitated by errors in City coding,
primarily in the construction and debt service areas. These coding errors should
be minimized so that the financial records of the City reflect a more accurate picture.
The above adjustments should be recorded on the City's financial records in 1980.
Council action is required to effect these cash transfers. We recommend that the
above transfers be recorded as early as possible so that the cash balances, and thus
interest earnings, will not be distorted for 1980.
City of Oak Park Heights
Management Report, Page 5
DUE FROM COUNTY
DECEMBER 31, INCREASE
DESCRIPTION 1979 1978 (DECREASE)
GENERAL FUND:
General Property Taxes $ 247 $ (247)
SPECIAL ASSESSMENT FUNDS:
General Property Taxes 60 (60)
Special Assessments $ 968 715 253
Totals $ 968 $ 1,022 $ (54)
The above amounts represent collections by Washington County during November and
December of each year. These amounts were remitted to the City with the April tax
settlement.
DUE FROM OTHER GOVERNMENTAL UNITS
DECEMBER 31, INCREASE
DESCRIPTION 1979 1978 (DECREASE)
C,E,T,A. Reimbursement $ 1,917 $ (
Court Fines 70 (70)
Shade Tree Grant 8,1]3 (8,113)
M,W,C,C, Final Cost Allocation $ 11,164 3,954 7,210
Totals $ 11,164 $ 14,054 $ (2,890)
DUE FROM DEVELOPERS
DECEMBER 31, INCREASE
DESCRIPTION 1979 1978 (DECREASE)
General Fund:
Cost Reimbursement $ 11,815 $ 10,298 $ 1,517
Special Assessment Fund:
Swagers - 7th Addition 19,663 39,326 (19,663)
62nd Street Improvement 22,866 (22,866)
Brekke Heights #2 64,848 330,750 (265,902)
Raymie Johnson Estates 31,839 113,234 (81,395)
Other 860 744 116
Totals $129,025 $517,218 $(388,191)
City of Oak Park Heights
Management Report, Page 6
The above amounts represent "Escrow Agreement" balances plus other amounts billed
to developers for construction costs incurred.
The amount due from Swager's for the 7th Addition represents the balance of the
1977 utility improvements and 1978 street improvements. This balance is payable at
the rate of $9,831 for each of two remaining lots.
The amount due from Brekke Heights #2 represents the balance of the 1978 and
1979 utility and street improvements net of a $38,000 refund made in 1980. This
balance is payable at the rate of $4,168 per lot on approximately 20 lots.
The amount due from Raymie Johnson represents the balance of the 1978 and 1979
utility and street improvements per the September, 1979 report of the City engineer.
This balance had not been billed to the developer until requested during this audit.
The timely receipt of these monies is extremely important as the financing for these
projects requires that the City receive and invest these monies to have sufficient
cash to off -set the related bond interest.
The City's policy and procedures relating to developer financed assessment pro-
jects is subject to conditions not under the control of the City (i.e. sales of lots
and homes by the individual developers). This situation could have adverse effects
on the City having sufficient cash on hand to meet bond maturities. We recommend that
the City review its policies and procedures in this area to insure that monies will
be available to meet bond maturities.
CONNECTION CHARGES RECEIVABLE
Connection charges receivable represents sewer and water hook-up charges to
property owners. The $32,719 balance at December 31, 1979 represents a $4,300 increase
during 1979 due to interest added to these charges in 1979. No payments were received
in 1979. We recommend that the City continue to extend its collection procedures on
these accounts to effect collection.
City of Oak Park Heights
Management Report, Page 7
DELINQUENT TAXES RECEIVABLE
Delinquent taxes receivable were $6,032 at December 31, 1979 representing a
$883 decrease during 1979 These taxes (when collected) will be remitted to the
City with the regular tax settlements. Tax collection during 1979 amounted to
over 100% of taxes levied in 1978 for collection in 1979,
SPECIAL ASSESSMENTS RECEIVABLE
DECEMBER 31, INCREASE
DESCRIPTION 1979 1978 (DECREASE)
Delinquent $ 7,368 $ 5,867 $ 1,501
Deferred 270,721 295 (25,192)
Totals $278,089 � $(23,691)
The deferred assessments decreased by $25,192 during 1979 due to prepayments
totaling $8,500 and the 1979 current installment of $16,600.
FUND EQUITY
DECEMBER 31, INCREASE
FUND GROUP 1979 1978 (DECREASE)
FUND BALANCE:
General Fund $178,195 $225,943 $ (47,74 -0)
Special Revenue 108,429 74,996 33,433
Capital Projects 111,130 86,857 24,273
Special Assessment:
Construction Accounts 20,207 281,027 (260,820)
Totals $417,961 $668,823 $(250,862)
RETAINED EARNINGS:
Water Operations 94,93 73,112 21,819
Sewer Operations 94,060 68,161 25,899
Totals - All Funds $606,952 $810,096 $(203,144)
As shown above, the financial position of the various funds of the City decreased
by $200,000 during 1979 with a total fund equity of $606,952 at December 31, 1979.
Much of this equity is committed for specified purposes, and not available for appro-
priation by the City.
City of Oak Park Heights
Management Report, Page 8
The fund balance of the General Fund is partially designated for committed
contracts at December 31, 1979• The undesignated balance ($155,000 at December 31,
1979) should be designated for the Working Capital (Cash Flow) Requirements of the
City as explained later in this Report. Additionally, the City has ordered con —
truction contracts in 1979 and 1980 which have not been fully financed. If alter—
native financing is not provided, General Fund monies will be depleted.
The fund balance of the Special Revenue (Federal Revenue Sharing) Fund has been
substantially appropriated to finance the 1980 Budget for the Revenue Sharing Fund.
These amounts are detailed later in this Report.
The fund balance of the Capital Project Funds — Capital Improvements Fund and
Lawcon Grant Fund are also substantially appropriated or designated at December 31,
1979• These amounts are also detailed later in this Report. Additionally, the City
has yet to comply with all rules and regulations of the State Planning Agency to
assure that the State Grant monies are totally earned and available to finance these
park projects.,
The fund balance of the various Special Assessment Funds is committed for debt
retirement and /or construction costs. Additionally, the City has awarded construction
contracts without formalizing the total financing thereof. This financing will have
to be provided at the earliest time.
The retained earnings of the Water and Sewer Utilities is partially committed
to finance working capital needs and fixed assets of these Utilities. These funds
are in good financial position at December 31, 1979 subject to future billings
from the M.W.C.C. and future customer billings.
City of Oak. Park Heights
Management Report, Page 9
The City is currently contemplating improvements to the City Hall complex
and wishes to finance these improvements internally. Monies available for this
purpose (subject to prior committments and the financinq thereof) are as follows:
1. Unappropriated and /or reappropriated Federal Revenue
Sharing monies.
2. Capital Improvement Fund monies already set aside
for this purpose.
3. Water and Sewer Utility surpluses not required for
other purposes or already committed for other
purposes.
The amount of funds available for the City Hall improvements depends to a
large degree upon how the City will finance other contruction committments. We
are available to discuss this matter with the City Council, upon request.
City of Oak Park Heights
Management Report, Page 10
GENERAL FUND
The financial statements for the General Fund are presented in Statements 7
and 8 of the 1979 Annual Financial Report. The fund balance of the General Fund
was $178,195 at December 31, 1979 representing a $48,000 decrease during 1979.
This decrease wa-s generally in accordance with the City's 1979 budget, as follows:
1, Budgeted Decrease $ ( 59,000)
2. Actual Revenue Over Budget 111,000
3. Actual Expenditures Under Budget (100,000)
Total Net Decrease $ ( 48,000)
The fund balance of the General Fund has decreased by $90,000 over the past
two years, as follows:
FUND INCREASE
YEAR ENDED DECEMBER 31, BALANCE (DECREASE)
1974 $190,547
1975 2 $ 39,431
1976 239,503 9,525
1977 268,754 29,251
1978 225,943 (42,811)
1979 178,195 (47,748)
At this point we recommend that the City Council establish a comprehensive
policy to define the proper level of surplus which will best serve the needs of the
City of Oak Park Heights. There are two criteria which should be addressed in
defining the surplus desired as follows:
1) EMERGENCY AND /OR UNANTICIPATED EXPENDITURES:
The diverse nature of a City's operations are such that unforeseen
events require financial fiexability. Examples of such events would
be natural disaster, lawsuits, unexpected capital outlay requirements
and timely preliminary funding for vital improvements. The level
of this surplus is a policy decision which may be measured as a per -
cent of the operating budget.
City of Oak Park Heights
Management Report, Page 11
2) WORKING CAPITAL (CASH FLOW) REQUIREMENTS:
Substantial funding of the General Fund is from property tax revenue.
These revenues - totaled $296,000 for 1980 (approximately 50% of
operating revenue of the General Fund), These monies are not
available to the City, however, until each July and December of
the calendar year. Therefore, a cash flow surplus of one -half of
the General Fund levy is required for daily cash flow needs through
the first half of the year (prior to the first major remittance
of property taxes). Under this criteria, the minimum required
operating surplus for the General Fund would currently be approx-
imately $150,000.
SPECIAL REVENUE FUND
The financial statements for the Special Revenue - Revenue Sharing - Fund are
presented in Statements 9, 10 and 11 of the 1979 Annual Financial Report. A summary
of the Revenue Sharing transactions from inception (December 1, 1972) through
December 31, 1979 is as follows:
PRIOR
YEARS 1979 TOTAL
REVENUE:
Revenue Sharing Entitlement $219,443 $ 55,604 $275,047
Interest on Investments 6,648 6,355 1 3, 00 3
Total Revenue $226,091 $ 61,959 $288,050
EXPENDITURES:
Park Land Acquisition $ 78,578 $ 78,578
Playground Equipment 6,648 6,648
Land Easement 1,75 1 ,75 0
Police Vehicles 9,75 $ 13,048 22,798
Park Fencing 21 , 2 95 21,295
Fire Protection 3,498 3,
Youth Service Bureau 4,576 2,212 6,788
Valley View Park improvements 25,000 25,000
Office Equipment 3,235 3,235
Public Works Vehicles 10,031 10,031
Total Expenditures $151,095 S 28,526 $179,621
BALANCE - December 31, 1978 $108,429
APPROPRIATIONS:
Park Improvements $ 45,000
Trees 15,000
Street Equipment 27,432
Valley Youth Service 2,212
Office Equipment 1,400 91,044
UNAPPROPRIATED BALANCE
December 31, 1979 $ 17,385
City of Oak Park Heights
Management Report, Page 12
The appropriations in the amount of $91,044 at December 31, 1979 were approved
by the City Council in October, 1979 and represent the 1980 operating budget for the
Revenue Sharing Fund.
The rules and regulations of the Federal Office of Revenue Sharing are subject
to frequent change. We recommend that the City continue to monitor its procedures
to assure compliance with all Revenue Sharing rules and regulations.
The rules and regulations of the Federal Office of Revenue Sharing include a
requirement that the financial records of a City receiving $25,000 or more of Revenue
Sharing grants per year, be audited and that the City obtain a "compliance audit"
and send a copy of the "compliance audit" to the Office of Revenue Sharing, at least
once every three years beginning with 1977. The City's regular audit satisfies the
financial audit requirements. The "compliance audit" requires additional verification
and audit procedures not included in the regular audit. Guidelines for this special
"compliance audit" were issued in January, 1978, This special "compliance audit"
must be performed and submitted to the Federal Office of Revenue Sharing for 1977,
1978 or 1979. The City has approved such an audit to be performed covering 1979.
This audit will be completed in 1980.
CAPITAL PROJECTS FUNDS
The financial statements for the Capital Projects Funds are presented in
Statements 12 and 13 of the City's 1979 Annual Financial Report. The City had
two Capital Projects Funds in 1979 and at December 31, 1979.
City of Oak Park Heights
Management Report, Page 13
CAPITAL IMPROVEMENTS FUND
The Capital Improvements Fund was established in 1978 to account for monies
set aside for the following future capital improvements:
1980
DESCRIPTION 1979 1978 TOTAL BUDGET
Municipal Building Expansion $ 15,000 $ 30,000 $ 45,000 $ 25,000
Seal Coat and Curb 10,000 10,000 20,000 20,000
Recreation 2,500 2,500 5,000 2,500
Unallocated Interest Earnings 1,652 3,867 5,519 --
Totals $ 29,152 S 46,367 $ 75,519 .S 47.SOO
The above amounts were fully invested at December 31, 1979 pending approval of
the above projects.
LAWCON GRANT FUND
The Lawcon Grant Park Improvements Fund was established in 1977 to account for
monies set aside for various improvements to the Valley View Park, as follows:
FINANCING PROVIDED:
State Grant ® Lawcon $ 80,000
City Participation:
General Fund 55,000
Revenue Sharing 25,000
Interest Earnings 11,921
Total Financing $171,921
EXPENDITURES:
Road Construction /Park Building $1
Capital Outlay 6,158
Professional Services 3,023 112,620
REMAINING BALANCE $ 59,301
The above balance is committed for additional improvements to the Valley View
Park, The State Grant in the amount of $80,000 was awarded to the City subject to
certain rules, regulations and reporting requirements of the State Planning Agency.
City of Oak Park Heights
Management Report, Page 14
The State Planning Agency requires the City to report to the State as to grant
monies expended. Such reports require invoices and copies of cancelled checks. The
Valley View Park Road construction project was constructed as part of the Brekke
Heights #2,and Raymie Johnson Estates projects. The engineering costs for all of
these projects were allocated on a percent basis in accordance with the final report
of the City engineer. Accordingly, the City may not be able to provide invoices and
cancelled checks in support of all costs charged to this project and the City may
jeopardize a portion of the State grant. We recommend that the City investigate
and resolve this situation at the earliest possible time. We also recommend that
the City continue to monitor its policy and procedures to insure compliance with the
rules, regulations and reporting requirements of the State Planning Agency.
SPECIAL ASSESSMENT FUND
The financial statements for the Special Assessment Fund are presented in State-
ments 14 and 15 of the City's 1979 Annual Financial Report. A Special Assessment
Fund is organized to account for both the construction and financing of assessable
improvement projects.
The accounting principles employed by the Special Assessment Fund - Debt Service.
Accounts are such that future interest on bonds payable is not reflected in the
Balance Sheet until the year it becomes payable and future interest on special
assessments is not reflected until the year it becomes receivable. Therefore, the
financial position of these funds do not reflect future interest receivable or
payable. Scheduled future tax levies are not reflected as income until the year
of collection. In order to project the final fund surplus or shortage these three
items must be considered.
City o' Oak Park Heights
Management Report, Page 15
The nature of a Special Assesment - 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 recorded to increase the fund equity to zero. This "amount to be
provided" is each funds' supplemental financing requirement. This supplemental
financing primarily will consist of future tax levies (scheduled and /or unscheduled)
but can be realized through cash connection charges, 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. Interest on investments and cash connection charges are
not considered due to uncertainties involved.
YEAR OF FUND SCHEDULED INTEREST PROJECTED
DEBT FINAL POSITION FUTURE FUTURE FUND
SERVICE ACCOUNT MATURITY 12/31/79 TAX, LEVIES ASSESSMENTS BONDS POSITION
Bonds of 1967
and 1968 1998 $(323,595) $1,174,700 $ 82,100 $518,440 $414,765
Bonds of 1971 1991 (108,016) 130,000 700 40,095 (17,411)
Bonds of 1976:
Construction
Account 1986 31,488 31,488
Debt Service
Account (53,918) 54,000 7,000 31,560 (24,478)
Bonds of 1977:
Debt Service
Account 1983 (1,503) 21,000 9,000 10,497
Bonds of 1978
and 1979:
Construction
Account 17,648 17,648
Debt Service
Account 1984 52,000 (52,000)
Completed
Construction 73,139 30,200 103,339
Totals $(364,757 $1,358,700 $14i,000 $651,095
Total Projected Surplus $483,848
Normal Projected Surplus (57, of Unmatured
Bond Principal and Interest) $119,305
City of Oak Park Heights
Management Report, Page 16
G.O. BONDS OF 1967 AND 1968
The projected surplus in the amount of $414,765 at December 31, 1979 represents
an $67,000 increase during 1979 due to cash connection charges and interest on invest-
ments. This projected surplus equals approximately 26% of future bond commitments at
December 31, 1979, indicating that the City may cancel a portion of the scheduled
future tax levies on these issues without impairing the ability of this account to
meet all future bond commitments.
The above surplus is generally the result of cash connection charges received
subsequent to the sale of these bonds. These cash connection charges were committed
to the reduction (or elimination, if possible) of the scheduled future tax levies.
This projected surplus may be used to finance the projected deficit of the other
special assessment debt service accounts, in addition to cancel future scheduled
tax levies (see later comments). We recommend that the City develop and initiate
a plan of action as to the use of this projected surplus.
STORM SEWER BONDS OF 1971
The projected deficit in the amount of $17,411 represents a nominal improvement
during 1979. The projected deficit indicates that this account will need additional
financing to meet all bond principal and interest requirements. These bonds mature
during the years 1979 through 1991. The projected deficit of this account will become
a cash deficit by 1988 or 1989. We recommend that the City establish a criteria to
finance the above projected deficit. The following options and alternatives are
available, at the discretion of the City Council:
1. Increased future debt service tax levies.
2. Cash transfers From other funds having surpluses available.
We recommend that the City levy an additional $25,000 to $30,000 tax levy in
October 1980 to be collected in 1981. Additionally, the City may cancel $25,000/
$30,000 of the 1980/1981 tax levy for the G.O. Bonds of 1967 and maintain an overall
debt service tax levy which is consistent with existing scheduled debt service
levies (see previous comments). Council action is required to efFect the above.
City of Oak Park Heights
Management Report, Page 17
G.O. BONDS OF 1976
During 1976, the City issued special assessment bonds in the amount of $249,000
to finance various improvement projects. The proceeds of this bond issue were
appropriated to the following improvement proj ects:
BOND ASSESSMENTS
IMPROVEMENT PROCEEDS ANTICIPATED ACTUAL
Swager - 6th Addition $138,160 $146,900 $117,829
Baudet Addition and Peller
Avenue 97,000 44,700 32,577
Totals $235,160 $191,600 $150.406
Actual construction costs totaled $204,000 rather than the expected $235,000
leaving a $31,000 balance in the construction account at December 3 1979. This
balance may be used to finance a similar improvement project or transferred to the
debt service account for this bond issue.
Actual assessments were less than anticipated due primarily to the reduced
construction costs. The projected deficit in the amount of $24,'78 at December 31,
1979 is the result of special assessments being less than anticipated and special
assessment prepayments and the resulting decrease in estimated future interest
thereon.
The projected deficit means that this account will require additional financing
to meet its bond principal and interest requirements. We recommend that the City
utilize the construction account balance to eliminate the projected deficit and that
the City maximize future interest on investments to build a 5% statutory surplus.
Council action is required to effect the construction account closing and the
related transfer to the debt service account.
City of Oak Park Heights
Management Report, Page 18
G.O. BONDS OF 1977
During 1977, the City issued special assessment bonds in the amount of $100,000
to finance various improvements. A summary of the financial activity of those improve-
ments and the related debt service is as follows:
F NANCI NG PROVI DE D:
Special Assessment and Billings
to Developers $246,770
Transfers from General Fund 38,273
Interest on Investments 2,741
Total Financing Provided $287,784
EXPENDITURES:
Construction Costs $274,965
Bond Interest and Discount 6,063
Other 6,756 287,784
FUND BALANCE -- December 31, 1979 $ m0-
All of the above projects were completed at December 31, 1979 and the Construction
Account was effectively closed. The projected surplus of the Debt Service Account
in the amount of $10,497 at December 31, 1979 represents a $3,000 improvement during
1979 due to interest on investments. The projected surplus represents 12% of future
bond maturities at December 31, 1979 indicating that this account has sufficient
assets to meet all bond requirements.
G.O. BONDS OF 1978 AND 1979:
During 1978, the City issued two special assessment bond issues (in the amount
of $100,000 each) to finance various improvements. A third $100,000 bond issue was
sold in 1979 for the same improvements. A summary of the financial activity of these
improvements and the related debt service is as follows:
City of Oak Park Heights
Management Report, Page 19
1978 1979 TOTAL
FINANCING PROVIDED:
Escrow Assessments and
Billings:
Raymie Johnson Estates $113,234 $ 11,753 $124,987
Brekke Heights #2 348,425 (106,652) 241,773
Interest - Investments 9 5,038 5,047
Total Financing $461,668 $ (89,861) $371,807
EXPENDITURES:
Construction Costs $279,863 $ 58,636 $338,499
Bond Discount 3,3 1,317 4,621
Debt Retirement 11,039 11,039
Total Expenditures $283,167 $ 70,9922 $354,159
FUND BALANCE - Construction
Account - December 31, 1979 $ 17,648
Escrow assessments and billings to developers included all construction costs
included capitalized or construction period interest. However, these assessments
are payable as the lots and /or houses are sold and the City is not charging interest
on these assessments. This could have a negative impact on the ability of this debt
service account to meet all bond requirements. The following schedule projects the
"cash- flow" of this account assuming all assessments and developer billings are
paid in 1979 and the City will invest these monies at an 8% rate of return,
OTHER INVESTMENT BOND
DESCRIPTION RECEIPTS INTEREST PAYMENTS BALANCE
Adjusted Cash Balance -
December 31, 1979 $205,000
1980
Collections from Developers $ 96,687
Interest Earnings (Payments) $ 16,400 $(19,400)
Bond Principal Payments (60,000) 238,687
1981
Interest Earnings (Payments) 13,200 (13,000)
Bond Principal Payments (60,000) 178,887
1982
Interest Earnings (Payments) 8,700 (9,600)
Bond Principal Payments (60,000) 117,987
1983
Interest Earnings (Payments) 4,100 (6,200)
Bond Principal Payments (60,000) 55,887
1984
Interest Earnings (Payments) (3,800)
Bond Principal Payments (60,000) (7,913)
City of Oak Park Heights
Management Report, Page 20
The above projected deficit in the amount of $7,913 is a direct result of the
City policy and procedures related to escrow assessments and developer billings.
Escrow assessments are not being charged interest after the construction period as
other assessments due. Developer billings are not being made timely and additional
interest is not being charged. We recommend that the City evaluate its policy and
procedures relating to escrow assessments and developer billings and that policy
and procedures be established and implemented to insure sufficient assets for the
payment of all bond requirements.
The projected deficit indicates that this debt service account will require
additional financing. The City has several options and three to fours years to
provide this financing. We recommend that the City develop a plan -of- action to
provide this additional financing.
COMPLETED CONSTRUCTION
During 1977, the City closed several completed construction accounts and
created the Completed Construction Account. This account had a fund balance of
$73,139 and a projected surplus of $103,339 at December 31, 1979. This surplus;
however, is not available to be expended. This surplus is composed of assessments
and other receivables at December 31, 1979. This surplus will become available
over the next fifteen years as these assessments and other receivables are collected
and converted to cash. This surplus, however, could be used to finance the projected
deficit for the Bonds of 1978 and 1979. See comments above.
City of Oak Park Heights
Management Report, Page 21
PRI SON UTI LI TI ES
The Prison Utilities special assessment fund was created in 1978 to account for
costs related to improvements at the new State Corrections Facility. Costs incurred
through December 31, 1979 totaled $6,134 (engineering and legal only) and construction
contracts were awarded in 1980. These costs have not been financed but will be
billed directly to the State. We recommend that the City establish policy and pro-
cedures to assure that these costs are billed (and collected) promptly and that the
City finances these costs, and that the City/ bill the State for the interest expense.
1979 UTILITIES
During 1979, the City entered into a construction contract for the construction
of a City Hall Watermain and the 56th Street Storm Sewer. Costs incurred through
December 31, 1979 were as follows:
City Hall Watermain $ 22 30U
56th Street Storm Sewer 96,000
Totals $118,300
The City Hall Watermain project is to be financed by the City's Water Utility.
Accordingly, the December 31, 1979 Interfund Audit Adjustments include an adjust-
ment to reflect this financing.
The 56th Street Storm Sewer project was assessed in 1980 for approximately 509%
of total costs. These assessments are collectible over a ten year term with interest
at 8 %. However, the City has taken no formal action to provide the additional 50%
financing nor the cash to finance the assessments over a ten year period. We recommend
that the City develop and effect a plan -of- action for this financing in 1980.
City of Oak Park Heights
Management Report, Page 22
SUMMARY OF ASSESSMENT ACCOUNTS
During the past several years, the City has increased its special assessment
construction and debt service activity. This increased activity requires financial
accounting control not required for the other financial operations of the City.
The operating fund of the City is controlled by the City Council by the annual
operating budget. The Special Assessment Funds do not have annual budgets, but
rather long -term budgets that start when a project is approved and continue until
the project is finished and the bonds are fully retired. City accounting systems
are designed to reflect annual operations and annual budgeting control. To be
effective for controlling and monitoring the Special Assessment Funds, additional
analytical information must be generated to compare actual results (from the incep-
tion of each project) with budgeted or projected results. This data must be prepared
or updated each time the City makes a long-term commitment (i.e. approval of construc-
tion contracts, sale of bonds, approval of assessment rolls, etc.). We recommend
that the City develop and implement policy and procedures to effect proper financial
controls over its special assessment construction and debt service activities. Our
office is available to assist the City, upon request.
ENTERPRISE FUNDS
The financial statements for the Enterprise Fund (Water and Sewer Utilities) are
presented in Statements 16 through 19 of the City's 1979 Annual Financial Report.
The City maintains its financial records on the basis of cash receipts and
disbursements. The records have been adjusted (for receivables, payables and other
accruals) to properly reflect income on the accrual basis and to present the finan-
cial position of each enterprise account at December 31, 1979. Condensed comparative
statements of income and expense for each of the City's utility operations follow.
City of Oak Park Heights
Management Report, Page 23
WATER OPERATING ACCOUNT
1979 1978
AMOUNT PER CENT AMOUNT PER CENT
INCOME:
Customer Billings $ 40,052 83.78 $ 41,773 96.19%
Other 7,752 16.22 1,653 3.81
Total Income $ 47,804 100,00 $ 43,426 100,0(P/
OPERATING EXPENSES:
Salaries $ 7,429 15.54% $ 8,774 20.21%
Contractual Services 14,338 29.99 11,535 26.56
Other 1,174 2.46 1,382 3,18
Total Operating
Expenses $ 22,941 47-99 $ 21,691 49.95%
NET INCOME BEFORE
DEPRECIATION $ 24,863 52.01% $ 21,735 50.05%
DEPRECIATION - Machinery
and Equipment 3,044 2,826
NET INCOME $ 21,819 S 18,909
SEWER OPERATING ACCOUNT
1979 1978
AMOUNT PER CENT AMOUNT PER CENT
INCOME:
Customer Billings $ 38,229 78.11% $ 37,736 91.75%
Other 10,712 21.89 3,394 8.25
Total Income $ 48,941 100.0M/ $ 41,130 100.00%
OPERATING EXPENSES:
M.W,C,C. $ 16,529 33.77°% $ 16,433 39.95%
Other 5,930 12,12 8,979 21.83
Total Operating
Expenses $ 22,459 45.89% $ 25,412 61.78
NET INCOME BEFORE
DEPRECIATION $ 26,482 54.11% $ 15,718 38,22%
DEPRECIATION - Machinery
and Equipment 583 583
NET INCOME $ 25,899, $ 1
City of Oak Park Heights
Management Report, Page 24
The Metro Waste Control Commission bills the City annually on an estimated
basis. These estimated billings are adjusted at a later date and the City is 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 sewer
operating account. The Metro Waste Commission billings for calendar years 1971
through 1980 are as follows:
ESTIMATED FINAL
YEAR BILLINGS BILLINGS
1971 $ 9,992 $ 4,175
1972 (53) 210
1973 (5,886) (1,803)
1974 (3,$25) 258
1975 (1,954) 6,641
1976 4,682 11,698
1977 13,903 9,949
1978 20,387 8,723
1979 26,202 Not Available
1980 19,257 Not Available
Note: The bracketed figures above indicate payments from the M.W.C.C.
The unbracketed figures above indicate payments to the M.W.C.C.
As the preceding schedule indicates, the billings from the M.W.C.C. vary
greatly and are increasing. These charges represent the largest single expense
of the Sewer Operating Account and fluctuations in this expense can mean the dif-
ference between a net income or a net loss. We recommend that the City monitor
the billings from the M.W.C.C. (and the related Customer Billings) to insure adequate
levels of operating income and net income. This monitoring and review should be
performed annually as the City is notified by M.W.C.C. as to current billings and
adjustments.
City of Oak Park Heights
Management Report, Page 25
FINANCIAL MANAGEMENT REQUIREMENTS
Financial management requirements for all Cities (Nationally) have increased
tremendously 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
normally 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 manage-
ment controls considered 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 considered to be adequate.
This new and changing environment places a greater burden upon the elected
and appointed officials of all governmental units, especially upon the finance
departments and finance personnel. How these burdens (or challenges) are addressed
today will have a significant effect upon 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, the
State Legislature enacted the City Financial Reporting Act of 1978. Subsequent
thereto, the Minnesota State Auditors Office issued its "Minimum Reporting Require
ments - City Financial Reporting ". This document incorporates changes and requirements
to be enforced on non - Minnesota cities for 1980. As usual, Minnesota cities are meet
ing the new challenges. This agressive approach will assure that Minnesota communities
will be able to meet the standards to be imposed in the future.
City of Oak Park Heights
Management Report, Page 26
The City of Oak Park Heights also, has not ignored these challenges. The
City's 1978 and 1979 Annual Financial Reports incorporate the changes and modifica-
tions required by the new "Minimum Reporting Requirements _ City Financial Reporting ".
These changes were accomplished in accordance with the new State requirements and
the City's desire to improve its financial reporting. This action will have con
tinued significance when the City authorizes future bond issues. Future accounting
standards will probably affect the City of Oak Park Heights in the area of bonding
at a reasonable interest rate.
The City's 1978 and 1979 Annual Financial Reports are comprehensive reports
containing financial information at December 31, 1978 and 1979 and for the years
ended December 31, 1978 and 1979 as well as budgetary comparisons. This document
incorporates the changes and adjustments required by the new reporting requirements.
These changes, however, have been made on audit worksheets and schedules only and
not on the financial records of the City.
The City's financial records are maintained substantially on the basis of
cash receipts and disbursements. These records are the product of the City's basic
accounting system which was designed and implemented during the early 1970's at
a time when cash-basis financial reporting was deemed to be adequate for Minnesota
cities. As such, these records and the accounting system are capable of producing
cash-basis financial reports in an efficient and timely manner. However, these
reports are no longer considered adequate. To achieve adequate financial reports,
the City's financial records must be analyzed and adjusted to convert them to the
proper basis (i.e. modified accrual). This process is time consuming and untimely.
Additionally, this process may limit the City's ability to meet the reporting standards
to be imposed in the future.
City of Oak Park Heights
Management Report, Page 27
We recommend that the City initiate an evaluation of its overall financial
management system based upon the present environment fior governmental financial
management and financial reporting. Such an evaluation should consider the finan -
cial management goals and requirements of the City today and for the next five to
ten years. This evaluation should become the foundation for developing a financial
management system to meet the growing burdens and challenges of the new environment.
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 al.l 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.
An accounting system is a part of the overall system of internal control and
is the means by which information is accumulated, recorded, classified, summarized
and reported. The prime purpose of any accounting system is to provide complete
and accurate financial information:(i) in proper form, (2) on a timely basis; and,
(3) with a minimum of cost.
Current auditing standards require an auditor to communicate any material
weaknesses in internal accounting controls directly to City Council and /or City
Administrators. Our examination for 1979 disclosed no material deficiencies in
the City's system of internal controls not identified in this report or past
reports to the City Council.
City of Oak Park Heights
Management Report, Page 28
SUMMARY
The following listing is a summary of the items to be recorded, investigated
and /or resolved during 1980.
1. Assign high priority to the implimentation of the new financial
accounting system.
2. Develop and impliment an investment program to meet the current needs
of the City.
3. Record cash transfers to effect the 1979 interfund Audit Adjustments.
4. Review and evaluate the City's policy relating to developer financed
special assessment projects and "escrow assessments ".
5. Effect collection of the old connection charges.
6. Define an adequate level of operating surplus for the General Fund
and maintain City policy within the established level.
7. Continue to monitor City policy and procedures to assure compliance with
rules and regulations of the Federal Office of Revenue Sharing and the
State Planning Agency and effect full compliance with the rules and
regulations relating to the Lawron Grant.
8. Effect the maintenace of the various Special Assessment - Debt Service
Accounts as previously detailed in this Report.
9. Effect the full financing of all construction projects ordered in
1979 and 1980 to date.
10. Continue to monitor and review the billings from the M.W.C.C. and the
related utility billings.
11. Evaluate the City's over - all financial management system to assure the
viability of this system for the next five to ten years.
Respectively submitted,
&6 _4 45"
DE LA HUNT VOTO & CO., LTD.
Certified Public Accountants
June 6, 1980