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HomeMy WebLinkAboutManagement Report and Recommendations CITY OF OAK PARK HEIGHTS, MINNESOTA MANAGEMENT REPORT AND RECOMMENDATIONS DECEMBER 31, 1981 a � , v i - i VdAHM. MM Lin s ma .. 1 "m al I ft I ! lo w -vi _.. . ma ft wm*umtuw MM am _ - - - - - -- A a - - -- -- - ...gyp ftw. • e Y - ., ... -. - a - - - -- - - -- -- - A somwomma - wo rum - - * . , _ ot - - - mba mot, �, - - wmqoad of `= $ %- Maw avou - IWO AM Mot y� UNWV aftlad to Oka" x _ _ w"WIM* Iwo OW - - - r I - _ - - - -. qg i I City of Oak Park Heights Management Report, Page 2 situation was uncertain and subject to .resolution at the State level. During the past year, the State has taken actions toward resolving this situation from the State's perspective. Included in those actions were policy changes on how local government is to be financed in the 1980's which represent a direct reversal of the State policy of the 1970's. These changes are complex and substantial. Accordingly, we have prepared a Special Report - Financing Minnesota Local Government in the 1980's to address these changes. This Special Report is being provided under separate cover, but as part of our ongoing obligation and commitment to inform our audit clients of any and all information deemed appropriate of City Council consideration. The balance of this Management Report will address the more routine and local items of interest to the Ciy Council and Administration. General And Special Revenue Funds The General and Special Revenue Funds of the City are maintained to account for the ' current and capital outlay expenditures common to all cities. Current financial reporting standards allow a city to reasonably compare its financial operations with other similar cities and also with its own prior years' financial operations. The following schedules and graphs reflect the overall 1981 and 1980 financial operations of the City's General Fund and Special Revenue Funds. Since 1978, State aids and local property taxes (used to finance the General and Special Revenue Funds of the City of Oak Park Heights) were as follows: State Aids Property Taxes Year Amount Per Cent Amount Per Cent 1978 $101,746 20.59% $211,577 42.85% 1979 111,149 22.74 219,802 44.97 1980 125,222 25.47 276,402 56.23 1981 124,936 20.53 386,515 63.50 The trend of higher State participation in the financing of the cost of basic ser- vices of the City is shown above. The trend may now be reversing. (See Special Report) City of Oak Park Heights Management Report, Page 3 Total revenue of the General and Special Revenue Funds for 1981 and 1980 are respectively as follows: 1981 1980 Description Amount Per Cent Amount Per Cent Property taxes $386,515 63.50% $276,402 57.24% Intergovernmental: State 124,936 20.53 125,222 25.93 Federal 57,420 9.43 46,399 9.60 Licenses and permits 16,263 2.67 13,423 2.78 Interest on investments 11,151 1.83 8,702 1.80 All other 12,416 2.04 12,774 2.65 Totals $608,701 100.00% $482,922 100.00% A graphic illustration of the above schedule is as follows: 1981 1980 F State State Federal Federal All Other All Other Property Property Taxes Taxes City of Oak Park Heights Management Report, Page 4 Total expenditures of the General and Special Revenue Funds were $533,788 for 1981 and $453,054 for 1980, as follows: 1981 1980 Description Amount Per Cent Amount Per Cent Current expenditures: General government $161,276 30.210 $117,583 25.96% Public safety 170,733 31.99 159,808 35.27 Streets and highways 43,928 8.23 45,869 10.12 Sanitation 63,586 11.91 58,534 12.92 Recreation 55,218 10.34 46,127 10.18 Capital outlay 39,047 7.32 25,133 5.55 Totals $533,788 100.00° $453,054 100.00% Detail of the above expenditures are presented in Statements 8 and 10 of the Annual Financial Report. A graphic presentation of the above schedule is as follows: 1981 1980 Public Public Safety Safety Capital Capital la Outlay Sanitation y Streets and Sanitation Streets and Recreation Highways Highways Recreation General General Government Government City of Oak Park Heights Management Report, Page 5 Combined Financial Statements The Combined Financial Statements of the City are presented in Statements 1 through 5 of the 1981 Annual Financial Report. The following comments relate to the Combined Financial Statements of the City. Cash And Investments December 31, Increase Description 1981 1980 (Decrease) Clerk's balance: Checking account (overdraft) $ (4,232) $ 2,984 $ (7,216) Investments 1,454,785 1,613,837 (159,052) Petty cash 50 50 Totals $1,450,603 $1,616,871 $(166,268) During 1981, the City made significant improvements in minimizing uninvested cash balances. The December, 1981 overdraft is the result of the City's policy of maximizing the investment of idle cash. This overdraft is a book overdraft only and does not t reflect a bank overdraft. During 1981, the City made significant improvements in mini- mizing uninvested cash balances. Uninvested balances averaged $90,000 for 1980 $11,000 for 1981; and approximately $1,000 since October, 1981 when the City established the Investment Fund. The Investment Fund allows the City to pool the cash available in all funds, making it possible to purchase investments in large denominations which generally offer greater yields than those available in small denominations. Investments at December 31, 1981 were composed of ten individual investments versus twenty at December 31, 1980 as follows: City of Oak Park Heights Management Report, Page 6 Investments December 31, 1981 December 31, 1980 Description Yield Balance Yield Balance Certificate of Deposit 16.25% $ 141,160 13.40% $ 159,522 Certificate of Deposit 15.75 133,000 8.61 124,714 Certificate of Deposit 16.00 117,000 8.59 316,185 Certificate of Deposit 13.00 274,500 14.10 126,937 Certificate of Deposit 16.87 326,000 17.25 155,010 Certificate of Deposit 12.75 144,000 Certificate of Deposit 12.37 249,000 Repurchase Agreement 11.25 64,074 Savings Account 5.25 6,051 5.75 27,763 Savings Account 6.00 37,147 Savings Account 5.25 15,456 Savings Account 5.25 50,753 Savings Account 5.25 162,047 Savings Account 8.00 56,724 Savings Account 8.00 30,879 Savings Account 5.25 30,036 Savings Account 5.25 4,094 Savings Account 5.25 529 Savings Account 8.00 145,662 Savings Account 5.25 641 Savings Account 5.25 48,243 Savings Account 5.00 121,495 Totals $ 1,454,785 $ 1,613,837 i Interest on investments totaled $197,000 for 1981 as compared to $132,000 for 1980. This improvement is the direct result of the City's new cash management system imple- mented during 1981. We concur with these new investment policies and procedures and commend the City for the actions and efforts taken in 1981. We recommend that the City continue to monitor and review its investment policies and procedures to assure that they remain appropriate as market conditions change. Security For Deposits Security for deposits is presented in Exhibit 5 of the 1981 Annual Financial Report. An analysis of collateral requirements and actual collateral pledged at December 31, 1981 showed the City to have sufficient collateral at one depository but insufficient collateral at another depository. The insufficient collateral was caused by the failure of the depository to properly deposit the collateral at another financial institution. See Exhibit 5. City of Oak Park Heights Management Report, Page 7 Minnesota Statutes, Chapter 118 requires specific levels of collateral for deposits in excess of Federally insured amounts and depositing of such collateral at another financial institution. The City is responsible for maintaining these required levels. We recommend that the City correct the above situation and establish procedures which will assure sufficient levels of pledged collateral in accordance with Minnesota Statutes, Chapter 118. Due From (To) Other Funds The Schedule of Interfund Audit Adjustments (Exhibit 1) presents a detailed explana- tion of cash transfers necessary to adjust the City's individual fund cash balances at December 31, 1981. These adjustments should be recorded on the City's financial records in 1982. Council action is required to effect these cash transfers. We recommend that the these transfers be recorded as early as possible so that the cash balances, and thus interest k earnings, will not be distorted for 1982. The City's financial accounting records have been adjusted for most of the December 31, 1981 year -end closing adjustments. However, additional adjustments should be made on the City's financial records. We recommend that the City record these additional adjustments so that the City's financial accounting records are in total agreement with the City's 1981 Annual Financial Report. Due From Other Governmental Units December 31, Increase Description 1981 1980 (Decrease) State share - prison utility construction $ 7,191 $ 13,397 $ (6,206) S.A.C. reimbursement 3,114 (3,114) Revenue sharing allocation 11,148 13,571 (2,423) Planning grant 1,000 (1,000) State withheld payments 32,338 32,338 Totals $ 50,677 $ 31,082 $ 19,595 City of Oak Park Heights Management Report, Page 8 Included in the preceding schedule are the withheld State aid payments ($32,338) of local government aid, homestead credit, machinery aid and other minor aids. This is the first year in recent history that such aid payments were not paid within the appropriated revenue year. The State passed legislation which guaranteed payment of these monies by February 26, 1982. The City received these amounts on March 1, 1982. For a discussion of the State crisis which precipitated these withholdings, see separate report titled "Financing Minnesota Local Government in the 1980's ". Due From Developers December 31, Increase Description 1981 1980 (Decrease) General Fund: Cost reimbursement $ 3,120 $ 3,120 Special Assessment Fund: Swagers ° 7th Addition $ 9,831 (9,831) Brekke Heights #2 243 25,255 (25,012) Rayraie Johnson Estates 31,839 (31,839) 57th Street Improvements 788 17,655 (16,867) Sunview Improvements 3,280 3,280 ' Swagers - 8th Addition 2,618 2,618 Other 502 (502) Developers Deposit Fund: Cost reimbursement 4,734 4,734 Deposits payable (846) (846) Totals $ 13,937 $ 85,082 $(71,145) The $3,280 due for the Sunview Improvement represents construction costs incurred by the City which are to be paid by the developer. I•lost of the remaining balances at December 31, 1981 represent amounts due for costs incurred in 1981. The timely receipt of these monies is extremely important as the financing of these projects requires that the City receive and invest these monies to have sufficient cash to off -set the related bond interest. During 1981, the City took action to collect the balance due on the Swagers 7th Addition, Brekke Heights #2 and Raymie Johnson Estates, The City certified the amount due as of October, 1981 to Washington County for collection. The balances certified are collectible in 1982 through the normal tax and assessment collection system. City of Oak Park Heights Management Report, Page 9 The collection of monies from the developers is extremely important to the City. Failure to receive monies from developers before these costs are paid by the City, has an adverse affect on the interest earnings of other funds by reducing the total monies available for investment. We recommend that the City develop policies and procedures with respect to developers projects to insure timely receipt of the monies in relation to when the City pays costs incurred on behalf of the developer. Connection Charges Receivable Connection charges receivable represents sewer and water hook --up charges to property owners. The $31,991 balance at December 31, 1981 represents a $1,099 increase during 1981. Of the total, amount of connection charges receivable at December 31, 1981, over 96% relate to two property owners. One such amount totaling $8,034 is being paid in annual installments with interest added. The other amount totaled $22,757 at December 31, 1981 and no collection terms have been established. This amount relates to 1976 connections. The City has referred collection of this amount to the City attorney. Delinquent Taxes Receivable Delinquent taxes receivable were $11,836 at December 31, 1981 representing a $6,156 increase during 1981. These taxes (when collected) will be remitted to the City with the regular tax settlements. Tax collection during 1981 amounted to over 980 of taxes levied for collection in 1981 representing a good collection rate. Special Assessments Receivable Special assessment receivable at December 31, 1981 and 1980 were; December 31, Increase Description 1981 1980 (Decrease) Delinquent $ 16,356 $ 12,177 $ 4,179 Deferred 331,944 324,526 7,418 Due from County 188 55 133 Totals $348,488 $336,758 $ 11,730 City of Oak Park Heights Management Report, Page 10 Delinquent special assessments totaled $16,356 at December 31, 1981. While this amount is not great, these delinquencies have doubled over the past two years. The City has access to detailed County records indicating specific parcels responsible for these delinquencies. We recommend that those records be reviewed and analyzed and that a listing be prepared to tabulate the major parcels involved. This listing should then be made available to the City Council and Administration to determine further action to be taken. Fund Equity December 31, Increase Fund Group 1981 1980 (Decrease) Fund balance: General $182,939 $127,647 $ 55,292 Special Revenue 78,747 149,986 (71,239) Capital Project 27,270 56,974 (29,704) Special Assessment: Construction 40,855 43,928 (3,073) Debt Service 36,413 5,789 30,624 f Totals 366,224 384,324 (18,100) Retained earnings: Enterprise 242,611 225,464 17,147 Totals -° all funds $608,835 $609,788 $ (953) As shown above, the financial position of the various funds of the City decreased by $1,000 during 1981 with a total fund equity of $608,835 at December 31, 1981. Much of this equity is committed for specified purposes, and not available for appropriation by the City. The fund balance of the Federal Revenue Sharing Fund has been substantially appropriated to finance the 1982 Budget for the Revenue Sharing Fund as detailed later in this Report. The fund balance of the Capital Project Fund - Capital Improvements Fund is also substantially appropriated or designated at December 31, 1981. These amounts are also detailed later in this Report. The fund balance of the Special Assessment Fund is committed for debt retirement and /or construction costs. The City of Oak Park Heights Management Report, Page 11 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, 1981 subject to future billings from the M.W.C.C. and future customer billings. General Fund The financial statements for the General Fund are presented in Statements 7 and 8 of the City's 1981 Annual Financial Report. The fund balance of the General Fund was $182,939 at December 31, 1981 representing a $55,300 increase during 1981. This increase was the result of the following: • Budgeted increase. The City budgeted revenue in excess of anticipated expenditures and transfers out. $ 65,000 • Actual revenue exceeded budgeted revenue. 25,900 Actual expenditures exceeded budgeted expenditures. (42,200) ° Unbudgeted transfer in. During 1981, the City closed the LAWCON Capital Project Fund. The residual balance was transferred to the General Fund. 6,600 Net increase in fund balance for 1981 $ 55,300 Details of the above amounts are presented in Statement 8 of the Annual Financial Report. The fund balance of the General Fund has decreased by $43,004 over the past three years, as follows: Year Ended Fund Increase December 31, Balance (Decrease) 1974 $190,547 1975 229,978 $ 39,431 1976 239,503 9,525 1977 268,754 29,251 1978 225,943 (42,811) 1979 186,836 (39,107) 1980 127,647 (59,189) 1981 182,939 55,292 City of Oak Park Heights Management Report, Page 12 The decreases in fund balance from 1978 through 1980 were primarily the result of transfers to Capital Project funds totaling $172,500 for those years. The City had a net transfer of $15,860 to Capital Project funds in 1981. Providing funding for Capital Projects from the General Fund can deplete General Fund operating reserves. The level of the fund balance of the City's General Fund is one indicator of the financial strength or independence of a City. This often becomes critical during periods of high inflation; decreasing State aids; and poor economic growth. Without adequate reserves, a City may be unable to respond to external factors such as State aid cuts or even changes in the timing of these payments. With adequate reserves, these external factors are more manageable by the City. An adequate fund balance for a City's General Fund is required for sound financial management of the diversified services provided by a City. A City's General Fund is the unofficial (and sometimes official) financial backer for all other City funds. Inadequate funding of various special purpose activities (funds) places an implied liability on the General Fund. Temporary cash overdrafts of certain funds must have offsetting cash balances in other City funds to maintain an overall positive cash balance for a City. The General Fund should maintain adequate cash balances to maintain operations without experiencing cash overdrafts. The cash overdraft of the City of Oak Park Heights' General Fund was $13,800 at June 30, 1981. For 1981, the General Fund had received one fourth ($14,250) of the local government aid in March. No local government aid will be available to the City until July for 1982. Currently, the City is not meeting the minimum required fund balance for the General Fund. This minimum required fund balance is measured by the cash-flow needs of the General Fund. To measure this minimum cash -flow amount, the following criteria should be applied; City of Oak Park Heights Management Report, Page 13 One half of the General Property Tax Levy plus one half of State aids The General Fund incurs operating expenditures throughout the year at a reasonably constant pace. Most of the anticipated .revenue required to meet these expenditures for the first half of the year is, however, not available. The revenue referred to is property taxes and State aids. Property taxes are remitted to the City pri- marily in two installments (July and December). State aids are now remitted to the City in monthly installments from July through December. Virtually, none of these monies are available to meet the expenditures of the first half of the year. Therefore, one -half of each of these revenue sources must be available at the start of the year to avoid cash overdrafts during that period. For the City of Oak Park Heights, the minimum required reserve (applying the above criteria) is $237,000 computed as follows: Before the Change After the Change in Timing of in Timing of State Aid Payments State Aid Payments 1982 Budgeted Levy (Includes Homestead Credit) $ 471,081 $ 471,081 Less: Reserve Levy (70,000) (70,000) 1982 Anticipated Local Government Aid N/A 73,203 Total $ 401,081 $ 474,284 ' Minimum Required Cash -Flow Reserve (One Half of Total.) $ 200,500 $ 237,000 Increased Reserve Requirement Caused by Change in State Payment Dates $ 36,500 The City was below the required minimum General Fund balance by approximately $54,000 at December 31, 1981. The City has adopted a surplus budget for 1982 which will increase the fund balance of the General Fund by $70,000. An appropriate level of operating reserve for the City's General Fund should be adequate to; • Meet minimum cash flow needs of the General Fund. • Provide a source of funding for emergency and /or unanticipated expenditures. • Provide a means of dealing with further. State and Federal aid cut -backs or delays in payments. • Establish reasonable assurance that the City's General Fund is in a position to provide back -up financing for other City funds should such circumstances arise. City of Oak Park freights Management Report, Page 14 The independence and autonomy of the City may be impaired without an adequate General Fund reserve. The City has adopted operating budgets at levels sufficient to increase the General Fund reserve balance for the past two years. We commend the City for these actions and encourage the City to continue these efforts. This reserve struc- ture will enable the City to retain its financial independence and integrity during the present changing economic environment. Special Revenue Fund The financial statements for the Special Revenue - Revenue Sharing - Fund are pre- sented in Statements 9, and 10 of the City's 1981 nnnual Financial Report. A summary of the Revenue Sharing transactions from inception through December 31, 1981 is as follows: Prior Years 1981 Total Revenue: Revenue sharing entitlements $321,446 $ 51,862 $373,308 ` Interest on investments 18,346 6,132 24,478 Total revenue $339,792 $ 57,994 397,786 Expenditures: Park land acquisition $ 78,578 78,578 Playground equipment 6,648 6,648 Land easement 1,750 $ 4,000 5,750 Police vehicles - equipment 22,798 11,045 33,843 Park fencing 23,052 23,052 Fire protection 3,498 3,498 Youth service bureau 6,788 2,240 9,028 Shade trees 6,091 10,289 16,380 Valley View Park improvement 25,000 25,945 50,945 Office equipment 5,412 5,412 Public works vehicles 10,031 10,031 City hall expansion 75,000 75,000 Other 160 714 874 Total expenditures $189,806 $129,233 319,039 Balance - December 31, 1981 $ 78,747 City of Oak Park Heights Management Report, Page 15 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 ". A copy must be sent to the Office of Revenue Sharing, at least once every three years. This special "compliance audit" was performed for the City of Oak Park Heights and sub- mitted to the Federal Office of Revenue Sharing for 1979. The City's next compliance audit will be required for 1982. The rules and regulations of the Federal Office of Revenue Sharing are subject to frequent change. The City did not meet all publishing requirements for 1981. Additionally, there is a regulation which requires the submission of Revenue Sharing form RS -9F to disclose the budgeted and actual amounts of Revenue Sharing expenditures for the prior year. The City erroneously disclosed current year amounts. We recommend that a corrected copy be submitted and that the City continue to monitor its procedures to assure compliance with all Revenue Sharing rules and regulations. Capital Project Funds The financial statements for the Capital Project Funds are presented in Statements 11 and 12 of the City's 1981 .Annual Financial Report. The City had one Capital Project Fund at December 31, 1981. Capital Improvements Fund The Capital Improvements Fund was established in 1978 to account for monies set aside for capital improvements as follows: City of Oak Park Heights Management Report, Page 16 Municipal Building Sealcoat Expansion and Curb Recreation Total Revenue and Other Sources: Transfers from General Fund: 1978 $ 15,000 $ 10,000 $ 2,500 $ 27,500 1979 30,000 10,000 2 42,500 1980 25,000 20,000 2,500 47,500 1981 20,000 2,500 22,500 Total transfers 70,000 60,000 10,000 140,000 Sale of property 9,414 9,414 Total revenue and other sources 79,414 60,000 10,000 149,414 Expenditures and Other Uses: Transfers out: Municipal building expansion (91,438) (91,438) Direct expenditures (1,595) (46,908) (48,503) Interest allocated to Municipal Building 13,619 13,619 Sub -total $ -0- $ 13,092 $ 10,000 23,092 Add: Interest earnings to date 17,797 Less: Interest allocated to Municipal Building (13,619) Sub -total 4,178 Fund balance -- December 31, 1981 $ 27,270 The remaining balance of $27,270 at December 31, 1981 is designated for sealcoating ($13,092); recreation ($10,000); and unallocated interest earnings ($4,178). 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 13,121 Total financing 173,121 Expenditures: Construction $149,841 Capital outlay 12,659 Professional services 3,981 166,481 Remaining balance - Transferred to General Fund $ 6,640 City of Oak Park Heights Management Report, Page 17 All grant activity was completed in 1980. The remaining balance was transferred to the City's General Fund in 1981 pursuant to Council approval on June 22, 1981. Special Assessment Funds The financial statements for the Special Assessment Funds are presented in Statements 13 and 14 of the City's 1981 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 collections. In order to pro- ject the final fund surplus or shortage these three items must be considered. The nature of a Special Assessment - Debt Service Fund is such that it will not reflect a fund deficit. In a fund which would reflect a deficit an "amount to be provided" is reported to increase the fund equity to zero. This "amount to be provided" is each funds' supplemental financing requirement. This supplemental financing pri- marily will consist of future tax levies (scheduled and /or unscheduled) but can be realized through 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 esti7:ated future interest receivable on deferred assessments. Future interest on investments and future connection charges are not considered due to the uncertainties involved, City of Oak Park Heights Management Report, Page 18 Year Of Fund Scheduled Interest Projected Debt Final Position Future Future Fund Service Account Maturity 12/31/81 Tax Levies Assessments Bonds Position Bonds of 1967 and 1968 1998 $ (5,440) $ 971,600 $ 62,700 $420,040 $608,820 Bond of 1971 1991 (67,131) 105,000 1,200 28,075 10,994 Bonds of 1976 1986 12,627 44,000 4,100 15,700 45,027 Bonds of 1977 1983 7,548 10,000 6,300 2,700 21,148 Bonds of 1978 and 1979 1984 16,238 10,000 19,600 6,638 Totals $ (36,158) $1,140,600 $ 74,300 $486,115 Total projected surplus $692,627 Normal projected surplus (5% of unmatured bond principal and interest) $ 93,555 Additional projected reserve $599,072 G.O. Bonds of 1967 and 1968 The projected surplus at December 31, 1981 of $608,820 represents a $64,000 improve- - t ment during 1981. This was a direct result of the following: Interest earned on investments $ 123,000 Cash connection charges 2,700 Cancellation of 1981/1982 tax levy (60,900) Decrease in estimated future interest on assessment due to prepayments (500) Other. charges - net (300) Total improvement $ 64,000 The positive projected fund position represents 44% of total debt service require- ments at December 31, 1981 indicating that this issue is adequately financed and that the City may cancel a portion of the scheduled future tax levies on the issues without impairing the ability of this account to meet all future bond commitments. City of Oak Park Heights Management Report, Page 19 Storm Sewer Bonds Of 1971 The projected surplus of $10,994 represents 8.5% of total debt service requirements at December 31, 1981 indicating that this is adequately financed. This projected surplus is unchanged since December 31, 1980. We recommend that the City continue to monitor the projected position of this bond issue to assure full and timely financing for these bonds. G.O. Bonds Of 1976 The projected surplus in the amount of $45,027 at December 31, 1981 represents a $19,000 improvement during 1981 due primarily to interest earnings on investments. This projected surplus equals approximately 36% of bond commitments at December 31, 1981 indicating that this fund will have sufficient assets to meet all debt requirements. G.O. Bonds Of 1977 The projected surplus in the amount of $6,638 at December 31, 1981 represents a i $10,000 increase during 1981. This improvement was primarily due to a supplemental tax levy of $10,000 collectible in 1982. We recommend that the City continue to monitor the projected position of this bond issue to assure full and timely financing for these bonds. G.O. Bonds Of 1978 And 1979 During 1978, the City issued two special assessment bond issues (ill 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 improve- ments and the related debt service is as follows: City of Oak Park Heights Management Report, Page 20 Financing provided: Escrow assessments and billings: Raymie Johnson Estates $124,987 Brekke Heights #2 241,838 Interest - investments 41,106 Total financing 407,931 Expenditures: Construction costs 343,260 Bond discount 4,621 Debt retirement - interest 43,812 Total expenditures 391,693 Fund balance - December 31, 1981 $ 16,238 Escrow assessments and billings to developers included all construction costs capitalized and construction period interest. These assessments were payable as the lots were sold and the City was not charging interest on these assessments. The City, in an attempt to collect the balance of assessments owing to the City, certified these assessments to the County to be paid in one installment in 1982 without interest added. The inability of the City to collect these assessments could have a negative impact on the ability of this debt service account to meet all bond requirements. However, should this amount be collected in 1982, this fund will probably have sufficient assets to meet all bond principal and interest requirements. The projected surplus in the amount of $6,638 at December 31, 1981 represents an increase of $34,000 during 1981. This was a direct result of the followings Supplemental Tax Levy $ 10,000 Investment Interest Earnings 24,000 Total improvement $ 34,000 We recommend that the City continue to monitor the projected position of this bond issue to assure full and timely financing. City of Oak Park Heights Management Report, Page 21 Summary of Special Assessment Debt Service Accounts The City's Special Assessment ° Debt Service Accounts are in an overall sound finan- cial position at December 31, 1981 based upon the preceding projections. The $692,000 projected surplus at December 31, 1981 represents a $128,000 improvement during 1981 caused by investment interest earnings. These investment interest earnings have been as follows for the past four years: Year Amount Increase 1978 $ 39,000 1979 80,600 $ 41,600 1980 103,200 22,600 1981 167,600 64,400 The above investment interest earnings have resulted in a situation whereby cash and investments on hand at December 31, 1981 total $1,099,000 while bonds payable ':�otal $1,385,000 at the same date. More important, investment interest earnings versus bond interest payments have been as follows: Interest Year Earned Paid Difference 1978 $ 39,000 $ 77,200 $ (38,200) 1979 80,600 84,600 (4,000) 1980 103,200 88,300 14,900 1981 167,600 76,700 90,900 As the above schedule and previous projections indicate, the City is in a position of developing excess reserve balances in its Special Assessment ... Debt Service Accounts. These reserve balances are committed for debt retirement purposes (of the individual fund) until final bond maturities of each bond issue. However, these surpluses may be used without restriction once the final bond payments have been made. Additionally, by cancellation or redesignating of specific debt service tax levies, the City could make a portion of these surpluses available prior to final maturity of spe- cified bond issues. The City would benefit from advance knowledge of these projected surpluses and the timing of when these projected surpluses would become available surpluses. City of Oak Park Heights Management Report, Page 22 In order to gain this information, a debt service study would be required. A debt service study is actually a cash -flow analysis (to the maturity of each bond issue) which projects the final cash position of each debt service fund based on: • current cash position. • future assessment revenue. • future property tax revenue. • future investment earnings. • future scheduled bond payments. • other factors. The ultimate effect of these various factors are dependent on changing variables (i.e., assessment collection rate, tax collection rate, investment earnings rate, etc.). Our office can provide a debt service study to the City incorporating a range of variables on each factor utilizing our internal electronic data processing system. Such a study would enable the City to analyze these projected balances and develop long -term financial options (and then plans) for the eventual use of these reserves. Completed Construction During 1977, the City closed several completed construction accounts and created the Completed Construction Account. This account had a fund balance of $83,934 and a pro- jected surplus of $108,934 at December. 31, 1981. This surplus, however, is not available to be expended. This surplus is composed of assessments and other receivables (including $20,000 of old connection charges) at December 31, 1981. This surplus will become available over the next fifteen years as these assessments and other receivables are collected and converted to cash. Prison Utilities The prison utilities special assessment construction fund was created in 1978 to account for costs related to improvements for the new State Correction Facility. A sum- mary of the financial activity of this improvement is as follows: City of Oak Park Heights Management Report, Page 23 Billing to State $102,610 Less: Oversizing of pipe - City share of cost 10,302 Net Billings to State $ 92,308 Construction costs: Contractor $ 93,859 Engineering 9,260 Legal and other 6,681 109,800 Additional amount billable to State 7,189 Fund balance (deficit) - December 31, 1981 $(10,303) All construction is complete on this project at December 31, 1981. The above defi- cit is the result of the failure of the State to pay for the project oversizing of the sanitary sewer line. In a letter received from the State in October, 1981, at the city, it stated they would pay additional costs if a detailed breakdown was provided. We recommend that the City bill the State for the entire cost of the Project (less the oversizing) and provide detail to substantiate all construction costs. Additionally, we recommend that the City provide financing for the oversizing portion of this project to close this fund in 1982. 1980 Utilities The 1980 Utilities special assessment fund was created in 1979 to account for costs - related to various utility improvements. A summary of the financial activity of this improvement is as follows: Financing provided: Special assessments and other charges $ 96,075 Interest on special assessments 5,402 Cash tranfers from Water and Sewer Utilities 27,583 Total 129,060 Construction costs: Sunview 24,,092 Valley View (storm sewer) 104,654 Other 27,584 156,330 Fund balance (deficit) - December 31, 1981 $(27,270) City of Oak Park Heights Management Report, Page 24 The above deficit is the result of the Valley View project being insufficiently financed. Project costs totaled $104,654 while assessments and other charges totaled $72,175 leaving a deficit of $32,479. A summary of construction costs by project com- pared to financing provided is as follows: Additional Construction Financing Financing Project Costs Provided Required Sunview $ 24,092 $ 24,092 $ -0- Valley View 104,654 72,175 32,479 Other 27,584 27,584 -0- Totals $156,330 $123,851 $ 32,479 The deficit in the Valley View project should be financed in 1982. We recommend that the City develop a plan of action to provide the additional required financing during 1982. 57th Street Improvement This construction fund was created in 1980 to account for the 57th Street Improvement Project. This project is 1000• financed by the developer. The assets of this fund at December 31, 1981 include a cash overdraft of $788 and an equal amount due from the developer financing this project. We recommend that the City monitor this pro- ject to assure timely billing and collection of the balance due from the developer during 1982. Swager's 8th Addition This construction fund was created in 1980 to account for costs incurred by the City in the Swager's 8th Addition which are billable to the developer. The assets of this fund a December 31, 1981 include a cash overdraft of $2,528 and a $2,617 amount due from the developer financing this project. We recommend that the City promptly invoice the developer as additional costs are incurred in 1982. The City should also monitor the collection of the bills sent to the developer to assure timely and adequate collection. City of Oak Park Heights Management Report, Page 25 Storm Drainage Improvement This fund was created in 1981 to account for possible storm drainage improvements in the City of Oak Park Heights. Costs incurred through December 31, 1981 total $5,506. No financing for this project had been determined or provided at December 31, 1981. Such financing should be determined and provided in 1982. Summary Of Assessment Accounts In past years, the City has had increased special assessment construction and debt service activity. For 1981, this activity has decreased. Special assessment construction/ debt service activity requires financial accounting control not required for the other financial operations of the City. The operating funds of the City are 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 inception 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 construction contracts, sale of bonds, approval of assessment rolls). As the City engages in more special assessment activity, greater accounting controls will be required. We recommend that the City continue its efforts to monitor the special assessment construction /debt service activity and increase accounting controls appropriately. Additional controls advisable at this time are as follows: ® Construction Project Files to provide timely and accurate data relating to the precise definition and scope of each individual project, as well as projected and historical cost information and data specifying the estimated and actual means of financing. City of Oak Park Heights Management Report, Page 26 Interim Special Assessment Construction Fund to provide a vehicle for accounting for project costs prior to final approval of each project. This one fund (by using the financial accounting system department code) can be used to accumulate and separate data for many projects. Once each project is approved, the past costs incurred can be trans- ferred to a separate fund. Enterprise Funds The financial statements for the Enterprise Fund (Water and Sewer Utilities) are presented in Statements 15 through 17 of the City's 1981 Annual Financial_ Report. During 1981, the City improved the reporting of income for the utility fund by recording the revenue billed to the City's utility customers at the time of billing. In previous years, this was done only at year end on audit workpapers in order to prepare third party financial statements. The recording of the utility revenue at the time of billing should improve the City's internal accounting reporting. Condensed comparative operating statements of income and expense for the utility operations excluding depre- ciation on contributed assets of the City are as follows. Water Department 1981 1980 Amount Percent Amount Percent Income: Customer billings and other $ 51,265 100.00% $ 50,865 100.00% Operating expenses: Salaries 11,031 21.51 13,106 25.76 Contractual services 14,969 29.20 14,414 28.34 Other 2,629 5.13 2,405 4.74 Total operating expenses 28,629 55.84 29,925 58.84 Net income before depreciation 22,636 44.16% 20,940 41.16% Depreciation - machinery and equipment 3,359 2,600 Net operating income $ 19,277 $ 23,540 City of Oak Park Heights Management Report, Page 27 Sewer Department 1981 1980 Amount Percent Amount Percent Income: Customer billings and other $ 51,391 100.00% $ 40,415 100.00% Operating expenses: M.W.C.C. 54,433 105.92 27,145 67.16 Other 9,977 19.41 2,360 5.85 Total operating expenses 64,410 125.33 29,505 73.01 Net income (loss) before depreciation (13,019) (25.33 %) 10,910 26.99% Depreciation °- machinery and equipment 133 140 Net operating income (loss) $(13,152) $ 10,770 The Metro Waste Control Commission (M.W.C.C.) bills the City annually on an esti- mated 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 M.W.C.C. billings for calendar years 1971 through 1982 are as follows: Estimated Final Year Billings Billings 1971 $ 9,992 $ 4,175 1972 (53) 210 1973 (5,886) (1,803) 1974 (3,825) 258 1975 (1,954) 6,641 1976 4,682 11,698 1977 13,903 9,949 1978 20,387 8,723 1979 26,202 34,090 1980 19,257 34,197 1981 39,492 Not available 1982 56,553 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. City of Oak Park Heights Management Report, Page 28 A graphic illustration of the estimated to finaI billings shows how drastically the charges from M.W.C.C. vary from estimated to actual and between years. 55 _ 50 _ 45� _ Final Estimated Billing Billing 40 _ 35 _ u«.W.C.C. Charges - — 30 _ (1,000's of Dollars) 25 _ ' 20 _ 15 _ _ 10 _ _ 5 0 '�°��| ���� � ---------------- `- 1971 1972 1973 1974 1975 1978 1977 1978 1979 1980 1981 1982 As the preceding illustration indicates, the billings from the M.W.C.C, vary greatly and are iocreaaiug. These charges represent the largest single expense of the Sewer Operating Account and fluctuations in this expense can mean the difference between a net City of Oak Park Heights Management Report, Page 29 income or 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. The City reviewed utility billing rates in 1981 and increased rates charged to the utility customer effective for the fourth quarter of 1981. The City should continue to review these rates annually and make adjustments to the rates based on costs incurred and expected to be incurred. Trust and Agency Funds The financial statements for Trust and Agency Funds are presented in Statement 18 of the City's 1981 Annual Financial Report. During 1931, the City established the Investment Fund and the Developers Deposit Fund. These funds were established to improve the operating efficiency and improve control over the financial activity. Investment Fund The Investment Fund was established in October, 1981 to account for all investment activity by the City. All. purchases, sales and interest earned are recorded in this fund. The Investment Fund allows the City to invest its cash not required for immediate disbursement to the maximum extent possible. Interest earnings are accrued and allo- cated to the other City funds on a monthly basis in the City's accounting system. Developers Deposit Fund The Developers Deposit Fund was established by Council action in December, 1981. The purpose of which was to account for all the developer activity which was previously accounted for in the General Fund. This fund will allow the City to more effectively control the activity of the deve- loper financed projects. The City should establish policies for developers to ensure that monies are received prior to or as costs are incurred. The non - receipt of monies City of Oak Park Heights Management Report, Page 30 has a negative impact on the interest earnings of other funds. The cash overdraft in this fund is temporarily financed by other funds of the City, thus decreasing the interest earnings of the other funds. We recommend that the City require a deposit from the developers equal to 125% to 1500 of the estimated cost or at least equal to the costs to be incurred by the City which will be charged to the developer. Internal Accounting Controls Our examination included a review of the City's system of internal control. A system of internal control comprises the plan of organization and all of the coordinate methods and measures adopted within a City to safeguard its assets; check the accuracy and reliability of its accounting data; promote operational efficiency; and insure adherence to Council policies and various Federal, State and local statutes. An accounting system is a part of the overall system of internal control and it is the means by which information is accumulated, recorded, classified, summarized and reported. The prime purpose of any accounting system is to provide complete and accurate financial information: (1) in proper form, (2) on a timely basis and, (3) cost efficiently. During our examination, our audit disclosed that various resolutions were not filed on a timely basis in the City resolution book. The Council minutes at the time of approval also did not disclose to us a resolution number for the resolutions adopted. This practice could have an adverse effect on the internal reporting procedures of the City of Oak Park Heights. The City should review this situation and determine correc- tive actions to be taken to resolve this situation. 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 1981, 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 31 Financial Management Requirements Over the past several years, the financial management requirements for all Cities have increased tremendously. Today, a completely new financial environment exists for Minnesota Cities as compared to the 1970'x. The changing financial environment is detailed in our Special Report - Financing Minnesota Local Government in the 1980's. Also, over the past several years, the City of Oak Park Heights has taken substan- tial action to meet the challenges of this new financial environment by improving its internal financial accounting, cash management, budgetary, and, overall financial manage- ment systems. These actions and the revised City policies and procedures are now starting to return to the City. Some of these benefits are as follows: • Increased investment interest earnings. • Improved and more timely collections of developers billings. • Improved reserve balances in the General Fund of the City. ® Improved projected financial positions of the Special Assessment - Debt Service Accounts. • Improved and more timely financing of the Special Assessment - Construction Projects. • Improved budgetary controls on the operating funds of the City. We commend the City these past efforts; congratulate the City on achieving the benefits; and, encourage the City to continue its efforts toward addressing the con- tinuing changes of the new financial environment. City of Oak Park Heights Management Report, Page 32 Summary The following is a summary of the items to be recorded, investigated and /or resolved during 1981. Additional explanations for each of these items can be found in the pre - ceeding sections of this report. • Continue to monitor the State financial situation and prepare City budgets and forecasts based upon decreasing or reduced aids from the State. (Special Report) • Continue to monitor and review the City's cash management and invest- ment policies and procedures to assure that they remain appropriate as market conditions change. (Pages 5 and 6) • Correct the situation relating to Security for Deposits. (Page 6) • Approve and record interfund cash transfers to effect the interfund audit and year -end closing adjustments at December 31, 1981. (Page 7) ® Record all other audit and year -end closing adjustments on the finan- cial accounting records of the City. (Page 7) • Develop City policy and procedures relating to developer financed projects and non - project costs to be reimbursed by developers and others. (Page 8) • Analyze and review delinquent Special Assessments at December 31, 1981. (Pages 9 and 10) • Continue City efforts toward developing an appropriate General Fund reserve balance. (Pages 11 through 14) • Continue to monitor and review the various rules and regulations of the Federal Office of Revenue Sharing and correct the Form RS -9F prepared for 1981. (Pages 14 and 15) • Continue to monitor, review and analyze the various Special Assessment - Debt Service and Construction Accounts of the City as detailed in this Report. (Pages 17 through 25) • Consider the desireability of a Special Assessment - Debt Service study and cash -flow analysis to develop long -term financial options for the projected reserves of these accounts. (Pages 21 and 22) • Continue to develop and provide additional financial accounting controls for the Special Assessment - Construction Projects as detailed in this Report. (Pages 22 through 2.5) City of Oak Park Heights Management Report, Page 33 • Continue to monitor the financial operations of the Water and Sewer Operating Accounts to assure adequate financing for these Utility Operations. (Pages 26 through 29) • Continue efforts to maintain, monitor and improve the financial accounting and financial management systems of the City to assure the availability and accuracy of information by which to manage the financial operations of the City. (Page 31) Respectfully submitted, A w / " 6. , DE LA HUNT VOTO & CO., LTD. Certified Public Accountants April 28, 1982