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Home My WebLink AboutManagement Report and RecommendationsCITY OF OAK PARK HEIGHTS, MINNESOTA MANAGEMENT REPORT AND RECOMMENDATIONS DECEMBER 31, 1983 � ,:, City of Oak Park Heights Management Report, Page 2 General and Special Revenue Funds The General and Special Revenue Funds of the City are maintained to account for the current and capital outlay 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 year's financial operations. Since 1979, 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: The above State aids are detailed as follows: Description _ State Aids Property Taxes Year Amount Percent Amount Percent 1978 $106,746 21.60% $211,577 42.85% 1979 111,149 22.74 219,802 44.97 1980 124,222 25.27 276,402 56.23 1981 124,936 20.53 386,515 63.50 1982 122,425 18.28 423,813 63.28 1983 149,391 19.75 482,084 63.72 The above State aids are detailed as follows: Description _ 1978 197 1980 - 1981 1982 1983 Local government aid $ 77,434 $ 77,434 $ 79,564 $ 75,994 $ 68,950 $ 82,324 Homestead credits 9,442 10,710 20,174 28,487 35,291 49,840 Police aid 8,381 8,127 9,037 9,751 10,263 10,720 Diseased tree 8,113 11,913 15,016 -0- 3,576 -0- Other 3,376 2,965 431 10,704 4,345 6,507 Totals $106,746 $111,149 $124,222 $124,936 $122,425 $149,391 Change $ 4,403 $ 13,073 $ 714 $ (2,511 $ 26,966 Percent Change 4.12% 11.76% .57% (2.01 % 22.03% City of Oak Park Heights Management Report, Page 3 Local government aid increased in 1983 by $13,374. This is a marked improvement over the decreases in local government aid in 1981 and 1982. The local government aid actually received in 1983 is equal to the aid originally alloted for the City to be received in 1982. The City has budgeted for 1984 local government aid in the amount of $94,074. This amount represents a 14% increase over 1983. Homestead credit aids have increased due to the following: • Additional homestead housing units. • Maximum credit $325 to $650 per housing unit (1974 to present). • Increase in City property tax levy. The City also has been receiving reduced assessment aid from the State. The reduced assessment aid is for a reduction in taxable valuation given to buildings which provide low income housing. The decrease in valuation was to be offset by the reduced assessment aid received from the State. This aid was provided by the State beginning in 1981. The State repealed this aid and the City will not be receiving this aid beginning in 1984. Reduced assessment aid received by the City totaled $4,077, $3,951 and $5,637 during 1981, 1982 and 1983 respectively. City of Oak Park Heights Management Report, Page 4 The following schedules and graphs reflect the combined revenue of the General and Special Revenue Funds for 1983 and 1982. Additional detail on the revenue is presented in Statements 7 and 9 of the 1983 Annual Financial Report. Description General property taxes Intergovernmental: State Federal Licenses and permits Charges for services Interest on investments All other revenue Total OUR ................. .................... Tia n ............................. ............................. Federal' ,• ........... Mite': 1.' fill F f 6tther,• ....... .... .......: ............................ ............................ ............................ ...... . . . . . . . . . . . . Federal: • .......... nil The increase in revenue in 1983 was primarily the result of an increase in the pro- perty tax levy (from $471,081 to $532,259) and an increase in local government aid of $13,374. Increase 1983 1982 ( Decrease ) $ 482,084 $ 423,843 $ 58,241 149,391 122,425 26,966 37,548 42,650 (5,102) 16,808 12,058 4,750 33,221 39,361 (6,140) 24,798 20,878 3,920 12,655 8,612 4,043 $ 756,505 $ 669,827 $ 86,678 ................. .................... Tia n ............................. ............................. Federal' ,• ........... Mite': 1.' fill F f 6tther,• ....... .... .......: ............................ ............................ ............................ ...... . . . . . . . . . . . . Federal: • .......... nil The increase in revenue in 1983 was primarily the result of an increase in the pro- perty tax levy (from $471,081 to $532,259) and an increase in local government aid of $13,374. City of Oak Park Heights Management Report, Page 5 Total expenditures of the General and Special Revenue Funds increased for 1983 as compared to 1982. The increase represents a 3% increase over 1982. Expenditures for 1983 and 1982 are as follows by major classification. A graphic illustration of the above expenditures as a percent of total expenditures is presented below. 198 necreutiur :: :: Streets & • - -- - -- Public: - .. Safety :Sanitation" General M f Government' " Capital ........... " " Outlay ecreation- Streets- ........... Public • _ ... S a i e t . . Sanitation ... . . . . . . General ...Gdunrnmunt .............. ' Capital ....... Outlay Detail of the above expenditures are presented in Statements 7 and 9 of the 1983 Annual Financial Report. Increase Description 1983 1982 ( Decrease ) Current expenditures: General government $ 131,768 $ 134,061 $ (2,293) Public safety 204,955 189,877 15,078 Streets and highways 62,900 48,442 14,458 Sanitation 63,814 58,362 5,452 Recreation 74,714 74,355 359 Capital outlay 13,793 29,813 (16,020 Totals $ 551,944 $ 534,910 $ 17,034 A graphic illustration of the above expenditures as a percent of total expenditures is presented below. 198 necreutiur :: :: Streets & • - -- - -- Public: - .. Safety :Sanitation" General M f Government' " Capital ........... " " Outlay ecreation- Streets- ........... Public • _ ... S a i e t . . Sanitation ... . . . . . . General ...Gdunrnmunt .............. ' Capital ....... Outlay Detail of the above expenditures are presented in Statements 7 and 9 of the 1983 Annual Financial Report. City of Oak Park Heights Management Report, Page 6 Condensed Combined Financial Statem The Condensed Combined Financial Statements of the City are presented in Statements 1 through 5 of the 1983 Annual Financial Report. The following comments relate to these Financial Statements of the City. Cash And Investments Descri Clerk's balance: Checking account (overdraft) Investments Petty cash December 31, Increase 1983 1982 (Decrease $ (1,670) $ (68,089) $ 66,419 1,870,257 1,923,610 (53,353) Kn Sn Totals $1,868,637 $1,855,571 $ 13,06 The December 31, 1983 and 1982 checking account overdrafts are book overdrafts only and do not reflect bank overdrafts. These balances are a result of the City's policy of depositing cash in interest bearing accounts in order to maximize investment earnings on City monies not needed for current expenditures. During 1983, the City maintained an average negative book balance in the checking account of $9,200. This balance and other factors allowed the City to earn $152,000 of interest on investments during 1983. Investments at December 31, 1983 and 1982 were as follows: December 31, 1983 1982 Investment Description Yield Balance Yield Balance Certificate of Deposit 9.75% $ 155,000 Certificate of Deposit 9.65 255,000 10.37% $ 300,000 Certificate of Deposit 9.50 100,000 8.75 115,000 Certificate of Deposit 9.40 329,400 9.00 300,000 Certificate of Deposit 9.45 309,750 8.37 100,000 Certificate of Deposit 9.75 100,000 8.15 422,500 Certificate of Deposit 9.70 240,000 9.00 272,000 Certificate of Deposit 10.00 328,000 8.80 360,000 Repurchase Agreement 8.25 53,107 7.97 54,110 Totals $ 1,870,257 $ 1,923,610 City of Oak Park Heights Management Report, Page 7 The interest earned decreased by $31,000 in 1983 due to a decrease in investment yields on Certificates of Deposit in 1983. Rates ranged from 10.00% to 8.12% in 1983 as compared to a 1982 range of 16.78% to 8.15 %. We concur with the City's method of investing monies and recommend that the City continue to monitor its policies and proce- dures on investing available cash balances. The City should continue to monitor the market conditions and change investment strategies and policies as deemed appropriate. Security For Deposits Security for deposits are presented in Exhibit 5 of the 1983 Annual Financial Report. An analysis of collateral requirements and actual collateral pledged showed the City to have sufficient collateral at all despositories at December 31, 1982, with one exception. Minnesota Statutes, Chapter 118 requires that specific levels of collateral for depo- sits be in excess of Federally insured amounts. The City is responsible for maintaining these required levels. We recommend that the City correct this situation. The City should also review its procedures to assure sufficient levels of pledged collateral in accordance with State Statutes. City of Oak Park Heights Management Report, Page 8 Due From (To) Other Funds The Schedule of Interfund Audit Adjustments below presents a detailed explanation of cash transfers necessary to adjust the City's individual cash balances at December 31, Fund Due From Due To Fund Title _ No. Other Funds Other Funds Capital Improvements: 401 $ 1,346.00 Storm Sewer Drainage Improvement 403 $ 1,346.00 To reclassify engineering charges Enterprise Fund 702 17,500.00 General Fund 101 17,500.00 To reclassify proceeds on sale of municipal property G.O. Bonds of 1967 and 1968 501 3,803.39 G.O. Storm Sewer Improvement Bonds of 1971 502 132.88 $100,000 G.O. Bonds of 1977 509 5,096.40 Completed Construction 510 1,209.11 $300,000 G.O. Bonds of 1978 and 1979 511 993.60 1979 Utilities 513 236.97 General Fund 101 6,227.42 G.O. Bonds of 1967 and 1968 501 22.83 $249,000 G.O. Bonds of 1976 506 508.14 $100,000 G.O. Bonds of 1977 509 4,251.50 Completed Construction 510 63.89 Enterprise Fund 702 398.57 To reclassify assessment collections Totals $ 30,318.35 $ 30,318.35 These adjustments should be recorded on the City's financial records in 1984 upon approval by the City Council. We recommend that the these transfers be recorded as early as possible so that the cash balances, and thus interest earnings, will not be distorted for 1984. The City's financial accounting records have been adjusted for most of the December 31, 1983 year -end closing adjustments. However, additional adjustments should be made to the City's financial records. We recommend that the City record the additional adjustments needed, as done in prior years, so that the City's financial accounting records are in agreement with the City's 1983 Annual Financial Report. City of Oak Park Heights Management Report, Page 9 Due From Other Governmental Units All of the above amounts are currently collectible or the City is pursuing collec- tion. Due From DeveloDers _ Description General Fund: Cost reimbursement Special Assessment Fund: Brekke Heights #2 57th Street Improvements Sunview Improvements Developers Deposit Fund: Cost reimbursement Deposits payable Totals December 31, Increase 1983 1982 ( Decrease ) $ 654 $ (654) 243 (243) 1,288 (1,288) 3,280 (3,280) $ 2,629 964 1,665 (1,207 (1,040 (167 $ 1,422 $ 5,389 $ (3,967 All of the above amounts are currently collectible. The amounts receivable at December 31, 1983 consist of expenditures incurred on behalf of developers. The City should monitor the amount of receivables from developers to insure timely receipt of monies expended. Failure to receive these monies on a timely basis will have a negative impact on the cash balance of the City and more importantly, may impair the city's abi- lity to receive reimbursement for services provided to prospective developers. December 31, Increase Description 1983 1982 ( Decrease ) State share - prison utility construction $ 7,190 $ 7,190 Fines 671 421 $ 250 Revenue sharing allocation 10,172 9,203 969 MWCC final cost allocation 8,817 5,445 3,372 City of Stillwater - construction costs 11,295 11,295 Totals $ 38,145 $ 22,259 $ 15,886 All of the above amounts are currently collectible or the City is pursuing collec- tion. Due From DeveloDers _ Description General Fund: Cost reimbursement Special Assessment Fund: Brekke Heights #2 57th Street Improvements Sunview Improvements Developers Deposit Fund: Cost reimbursement Deposits payable Totals December 31, Increase 1983 1982 ( Decrease ) $ 654 $ (654) 243 (243) 1,288 (1,288) 3,280 (3,280) $ 2,629 964 1,665 (1,207 (1,040 (167 $ 1,422 $ 5,389 $ (3,967 All of the above amounts are currently collectible. The amounts receivable at December 31, 1983 consist of expenditures incurred on behalf of developers. The City should monitor the amount of receivables from developers to insure timely receipt of monies expended. Failure to receive these monies on a timely basis will have a negative impact on the cash balance of the City and more importantly, may impair the city's abi- lity to receive reimbursement for services provided to prospective developers. City of Oak Park Heights Management Report, Page 10 Connection Charges Receivable Connection Charges Receivable represents sewer and water hook -up charges to property owners from previous years. The City, in 1983, collected approximately $22,000 of the connection charges receivable (of $30,109 at December 31, 1982). The balance of $8,376 is being paid in annual installments with interest added. Taxes Receivable - Delinquent Taxes Receivable - Delinquent consist of taxes levied in the previous six years by the City but not collected by the County and remitted to the City. The collection rate on property taxes was approximately 100% for 1983 as compared to a 1982 rate of 98%. Property tax collections were as follows for 1983 and 1982: 1983 1982 Delinquent taxes - January 1 $ 16,175 $ 11,835 Current levy 605,259 521,081 Total collectible 621,434 532,916 Receipts: Property owners 542,446 467,464 State 63,366 43,408 Total receipts 605,812 510,872 Unadjusted balance 15,622 22,044 Homestead credit loss (5 Delinquent taxes - December 31 $ 15,622 $ 16,175 Total collections as a percent of current levy 100% 98%/99% The increase in collection rate from 98% to 100% reflects an improved collection rate and indicates that the State has paid its full share of the homestead credit deducted from property owners tax statements. For 1982, the State did not remit full homestead credits due. This reduced the overall collection rate by 1 %. City of Oak Park Heights Management Report, Page 11 §pecial Assessments Receivable 1983 1982 Percent $ 27,275 Special assessments receivable consisted of the following types and amounts at: Assessments December 31, Increase Description 1983 1982 ( Decrease ) Delinquent $ 8,195 $ 27,275 $(19,080) Due from County 3,166 1,502 1,664 Deferred 323,405 259,294 64,11 Totals $334,766 $288,071 $ 46,695 Delinquent special assessments have been as follows for the past several years. The change in delinquent assessments receivable over the past two years was as follows: 1983 1982 Percent $ 27,275 Delinquent Increase Increase December 31, Assessments ( Decrease ) ( Decrease ) 1978 $ 5,867 106,654 Less collections: 1979 7,368 $ 1,501 25.58% 1980 12,177 4,809 65.26 1981 16,356 4,179 34.31 1982 27,275 10,919 66.76 1983 8,195 (19,080) (30.05) The change in delinquent assessments receivable over the past two years was as follows: 1983 1982 Delinquent balance - January 1 $ 27,275 $ 16,356 Add: Current installments 59,286 90,298 Amount collectible 86,561 106,654 Less collections: Current 56,847 76,415 Delinquent 21,636 2,732 Total collections 78,483 79,147 Adjustments 117 (232 Delinquent balance - December 31 $ 8 $ 27,275 Percent of current levy collected 95.88% 84.62% City of Oak Park Heights Management Report, Page 12 Since 1978, the City had been experiencing an increase in delinquent assessments receivable. During 1983, this trend reversed as the City collected over $21,600 of prior delinquent assessments. The delinquent receivable decreased by $19,000 in 1983. The collection of these assessments has a positive impact on the cash balances of the City's debt service funds. A solid collection rate is essential for the City's debt service funds to maintain adequate cash balances in order to meet debt service payments on a timely basis. Fixed Assets The City currently does not maintain detailed records nor accounting controls over general fixed assets. This is not uncommon to suburban Minnesota cities. The effect, however, is that the control over movable assets is diminished. Additionally, docu- mented information for insurance claims may not be readily available. The cost of a complete fixed asset system may be prohibitive for the entire City at this time. Accumulation of fixed asset records for various departments, however, could be accomplished at a lesser cost and all departments could eventually be phased in. The task would require research into accounting records and physical identification of cer- tain movable assets. The benefit of such an effort would be greater safeguarding of City assets. The City is currently reviewing internal computer capability options. The City may acquire a system capable of maintaining fixed asset records. Although imple- mentation of this feature would be a lower priority, we recommend that the City investi- gate the benefits of establishing computerized fixed asset inventory and accounting records for the City's fixed assets. During 1983, the City acquired a police car. The City received quotations for this acquisition. The City did not select the low quotation, based on availability of ser- vice. We recommend that if the City intends to award a purchase contract to a company City of Oak Park Heights Management Report, Page 13 which has not submitted the lowest quotation, that the City consult the City attorney to determine if compliance with Minnesota Statutes section 471.345 is achieved. The Minnesota Municipal Contracting Law (section 471.345) establishes purchasing parameters as follows: 471.345 UNIFORM MUNICIPAL CONTRACTING LAW (Excerpts) Subd. 2. Contract defined. A "contract" means an agreement entered into by a municipality for the sale or purchase of supplies, materials, equipment or the rental thereof, or the construction, alteration, repair or maintenance of real or personal property. Subd. 3. Contracts over $15,000. If the amount of the contract is estimated to exceed $15,000, sealed bids shall be solicited by public notice in the manner and subject to the requirements of the law governing contracts by the particular municipality or class thereof provided that with regard to repairs and maintenance of ditches, bids shall not be required if the estimated amount of the contract does not exceed the amount specified in section 106.571, subdivision 2. Subd. 4. Contracts from $10,000 to $15,000. If the amount of the contract is estimated to exceed $10,000 but not to exceed $15,000, the contract may be made either upon sealed bids or by direct negotiation, by obtaining two or more quotations for the purchase or sale when possible, and without advertising for bids or otherwise complying with the requirements of competitive bidding. All quotations obtained shall be kept on filed for a period of at least one year after receipt thereof. Subd. 5. Contracts less than $10,000. If the amount of the contract is estimated to be $10,000 or less, the contract may be made either upon quotation or in the open market, in the discretion of the governing body; but shall be based on at least two quotations which shall be kept on file for a period of at least one year after receipt thereof. An apparent oversight in the text of this law does not set a minimum required contract. Subdivision 5 includes "contracts less than $10,000 ". A "contract" includes an agreement to purchase supplies and materials. Strict interpretation of this statute may require retention of two quotations on virtually all supply and materials purchases of the City. There is pending legislation to correct this oversight in the 1984 legislative session. We recommend that the City be aware of compliance parameters and correspondingly review purchase procedures of the City to assure such compliance. City of Oak Park Heights Management Report, Page 14 Compensated Absences Payable Compensated Absences Payable consist of employee benefits for vacation and severence pay which are vested by the employee and for which payment is probable. Compensated Absences have been recorded at December 31, 1983 and 1982 (restated). Severance pay benefits are payable to the City's police employees who have been with the City in excess of 10 years. These employees have vested severence pay which totaled $8,819 and $6,941 at December 31, 1983 and 1982 respectively. Also included in the accrual for compensated absences is vacation pay benefits for all City employees of $1,987 at December 31, 1983 and $2,229 at December 31, 1982. Bonds Pavable Balance ® January 1, 1983 New Issues Principal Payments Balance - December 31, 1983 Bond issues Special Special Assessments District $ 1,375,000 $ 205,000 Revenue Bonds Totals _ $ 190,000 $ 1,770,000 80,000 80,000 (155,000 (10,000 (165,000 $ 1,300,000 $ 205,00 $ 180,000 $ 1,685,000 The City issued the Improvement Bonds of 1983 to finance improvements (water, sewer and streets) in the Heights Business Park. The bonds are to be financed 100% by special assessments according to the bond resolution and therefore, no deferred tax levies are scheduled. Detail of outstanding bond issues are contained in Exhibit 2 of the 1983 Annual Financial Report. City of Oak Park Heights Management Report, Page 15 A recent change in Federal legislation requires that municipal bonds be registered. Registration can be effected by a variety of methods depending upon the nature of the clebt instrument. The objective of any system is to maintain a record of ownership. Any sale or transfer of ownership requires action by the named "registrar" to update ownership records. The City has issued the $80,000 General Obligation Improvement Bonds of 1983. The City has named itself as the registrar of record for this issue. As registrar (and paying agent), the City increases its responsibility for administration of the debt. The 1983 issue is a .relatively small issue and consists of a single bond (and therefore a single bondholder). Additionally, the bondholder is a local bank. As such, the sale or transfer of the bond is unlikely and therefore the City may not be required to effect numerous transfer documents. Larger issues, however, may be designed to include an increased number of bonds and therefore a greater likelyhood of periodic transfers. The cost /benefit factor of naming a third party registrar (versus assuming this respon- sibility internally) for larger issues should be carefully considered for any future (larger) bond issues. Fund Equity Fund Group Fund balance: General Special Revenue Debt Service Capital Project Special Assessment: Construction Debt Service Totals Retained earnings: Enterprise December 31, Increase 1983 1982 ( Decrease ) $ 453,507 $ 300,999 $152,508 58,314 69,529 (11,215) 1,591 20,782 (19,191) 10,941 203,584 (192,643) 78,423 113,406 (34,983) 254,240 139,393 114,847 857,016 847,693 9,323 348,692 280,153 68,539 Totals - All Funds $1,205,708 $1,127,846 $ 77,862 City of Oak Park Heights Management Report, Page 16 As shown above, the financial position of the various funds of the City increased by $77,862 during 1983. Most of this equity is committed for specified purposes, and not available for appropriation by the City. General Fund The financial statements for the General Fund are presented in Statements 6 and 7 of the City's 1983 Annual Financial Report. The fund balance of the General Fund was $453,507 at December 31, 1983 representing a $152,508 increase during 1983. This increase was the result of the following: • Budgeted increase The City budgeted revenue in excess of anticipated expenditures and transfers out. • Actual revenue exc eeded budgeted revenue Licenses and permits Fines and forfeits Interest on investments Other • Budgeted expenditures less (greater) than actual expenditures General government Sanitation Parks Other Contingency • Actual transfers out in excess of budgeted transfers out. Net increase in fund balance for 1983 $ 6,108 5,130 13,181 9,912 $ 62,319 34,331 16,152 (4,314) 11,294 (3,506) 37,000 56,626 (768 $ 152,508 Details of the above amounts are presented in Statement 7 of the Annual Financial Report. The fund balance of the General Fund has increased by $270,568 over the past two years. The schedule below reflects the fund balances for the past eight years: Year Ended Fund Increase December 31, Balance ( Decrea se) 1976 $239,503 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 1982 300,999 118,060 1983 453,507 152,508 City of Oak Park Heights Management Report, Page 17 The increases in 1983 and 1982 are the direct result of the City adopting surplus budgets and favorable actual results compared to budget. The City has adopted a surplus budget for 1984 in the amount of $40,000. The increases over the past several years were necessary for the City to attain its required minimum reserve balances (see later comments). 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. With adequate reserves, these external factors are more manageable by the City. Cities commonly have three major combinations of services /funding sources as follows: • User Charge Supported includes current services or capital improvements which are charged directly to the user or benefiting property owner. Examples include sewer and water service; capital improvements such as street, sewer or water improvements. These activities are self- supporting in nature. Sewer and water rates are set based on cost of delivery of services. Special assessments against benefiting properties are recovered through charging total cost by an allocation factor such as frontal linear feet. This type of financial activity is commonly (although not limited to) accounted for in the Enterprise and Special Assessment Funds of the City. • Matching Grant Supported includes current services or capital improvements which are matched by specific intergovernmental funding sources such as shade tree disease control or certain types of park improvements. Expenditures of these types are directly matched in whole or in part by intergovernmental sources. These types of matching revenues are commonly not repetitive in that they address specific projects or improvements and are commonly subject to phase -out. Many of these types of projects are non - essential in nature and should the funding be reduced or eliminated, the matching expenditure can often be reduced or eliminated. This type of financial activity is commonly accounted for in the Capital Project Funds of the City. • General Revenue Supported includes delivery of basic services common to all cities such as public safety, public works, recreation, and overall City admini- stration. Funding for these basic services is provided through a combination of often limited funding sources. The predominate funding source for these basic activities in Minnesota are general property tax levies and intergovernmental (non - designated) grants and aids. This type of financial activity is commonly accounted for in the General Fund of the City. City of Oak Park Heights Management Report, Page 18 The expenditures and corresponding revenues of the first two categories are designed to be self- balancing. The City sets user charges at levels adequate to match the expen- diture levels incurred in delivering utility services and /or assessable improvements. Matching grant programs are likewise designed to be self - supporting except for the City share which varies depending upon the terms of the intergovernmental agency involved. This general City portion must be funded from discretionary revenues of the City. The final category above, which deals with delivery of basic services (public works, public safety, general government, etc.), commonly presents the greatest challenge to City Councils and City Administrations. Cities must provide adequate levels of public ser- vices with uncertain and (often declining levels) of discretionary revenues. This challenge is addressed annually by the City in monitoring the financial position (budgets) of the City's General Fund. Expenditures are commonly affected by the following: • A fluctuating overall inflation rate. • Growth of the City. • Unanticipated events of nature (such as unseasonably heavy snowfall, flooding, storm damage, etc.). • Other unanticipated expenditures (such as legal defense of lawsuits, change in statutory requirements including funding levels for pension funds, arbitration rulings with bargaining units, etc.). • Introduction of new programs. Predicting expenditures for an ensuing year (or longer) is subject to the above "moving targets ". In addition to funding the cost of basic services, the General Fund is often required to provide supplemental financing for other City endeavors (accounted for in other funds) which are not completely self - supporting. Examples of these supple- mental financing transfers might be as follows: • City share of grant programs which were not fully funded by intergovernmental grants. • City share of project cost which was deemed to be not fully assessable. • Unanticipated and /or excessive utility fund repairs. City of Oak Park Heights Management Report, Page 19 As presented above, the required (essential) level of outflows (expenditures and transfers out) from the City's General Fund are subject to factors which are often beyond the City's direct control. Additionally, there can be optional projects and programs which the City may wish to undertake in the interest of overall community bene- fit such as park improvements and /or recreation programs. Matching revenues to fund these basic service expenditures have restrictions on their availability as follows: ° Timing in receipt of major revenue sources Property taxes are primarily received by the City in July and December. Additionally, major State aids (local government aid and homestead credits) are received in six monthly installments starting in July. A majority of expenditures are incurred evenly throughout the year yet two of the major funding sources are not available until after one -half of the operating cycle has elapsed. Cities must therefore maintain a reserve balance to fund the delivery of basic ser- vices for the six months of the year prior to receiving these major revenue sources. ° Cities are often under statutory restrictions which regulate the amount of prop taxes which can be levied for an operating year Additionally, there are self - imposed restrictions on the amount of property taxes which a city is willing to tax its citizens in light of increasing school district, county, and other taxing authority increases. Property tax revenue is therefore (oftentimes) a limited financing source for cities. Additionally, full collection of these property taxes is not assured. Delinquent property taxes reduce the amount available for expenditure during the current operating cycle. For 1982, the State of Minnesota contributed to the delinquency of property taxes levied through a reduction of the State paid homestead credit ( after the reduction of individual property owners propert tax bills There is speculation that this type of delinquency may occur in future periods as the State looks to solve other funding shortfalls. ° Intergovernmental revenue The Federal government, the State government and other local units of government are addressing budget shortfalls. Solutions to their budget problems are often directly passed through to cities. Intergovernmental revenues historically have been a primary funding source for delivery of basic services by Minnesota cities. As these aids are reduced, the overall revenue available to fund expenditures is impaired. City of Oak Park Heights Management Report, Page 20 The receipt of major revenues available for the City to finance basic services are limited and are not received in a timely manner (i.e., they do not match the City's operating expenditure cycle). Additionally, as described above, necessary expenditure levels are often affected by factors which are beyond the City's direct control. For these reasons, cities must maintain operating reserve balances in their General Fund The reserve balance must be maintained at a level which will: • Assure the continuing ability to provide basic services during temporary periods of economic crisis (such as high inflation rates). • Meet cash flow timing differences. • Be adequate and available to meet emergency and /or unanticipated expenditures. • Be adequate to offset intergovernmental revenue shortfalls on a short -term basis (i.e., when cuts are made after the operating budget for the City is established). The amount of General Fund reserve required to meet emergency and /or unanticipated expenditures is not readily quantifiable. Rather, the level of this requirement must be established by the City based on the history of the City and the philosophy of "adequate" reserve coverage. The reserve requirement to deal with unforeseen intergovernmental revenue reductions is also difficult to quantify. State and Federal legislation dealing with shared aids is somewhat unpredictable. The City must strive to remain current on the effects of changing legislation and budget such aids accordingly. A reserve balance in the City's General Fund will mitigate the adverse effects of aid reductions which are received after expenditure budget commitments are made. The City's minimum cash flow reserve requirement is measurable. For the City of Oak Park Heights, the minimum required surplus is $345,000 computed as follows: 1984 Budgeted Levy (Includes Homestead Credit) $ 595,000 1984 Anticipated Local Government Aid 94,000 Total $ 689,000 Minimum Required Cash -Flow Reserve (One -Half of Total) $ 345,000 City of Oak Park Heights Management Report, Page 21 The City has demonstrated that a financially sound General Fund is attainable through prudent fiscal planning. The City has met its cash flow required reserve and also has approximately $108,000 of other General Fund reserves to fulfill the various other reserve requirements as described in this report. One option available to the City is to formalize the reserve policy of the City through designations of General Fund reserve balances. The first and foremost reserve would be the cash flow reserve of $345,000 which should be reviewed (and adjusted) periodically. Other reserves could be designated for compensated absences, construction fund deficits, equipment replacement, etc. Desgination of reserve balances, while not required, may assist the City in defining (formalizing) the reserve requirements of the City. Without this adequate General Fund reserve, the independence and autonomy of the City may be impaired. The City of Oak Park Heights has taken actions over the past several years to improve the financial position of its General Fund. We commend the City for these actions and encourage the City to continue to monitor this reserve balance. An adequate reserve structure will enable the City to retain its financial independence and integrity during the present change in economic environment. City of Oak Park Heights Management Report, Page 22 Special Revenue Fund The financial statements for the Revenue Sharing Fund are presented in Statements 8 and 9 of the City's 1983 Annual Financial Report. A summary of the Revenue Sharing transactions from inception through December 31, 1983 is as follows: Revenue: Revenue sharing entitlements Interest on investments Prior Years 1983 Total $415,958 $ 37,548 $453,506 32,023 4,617 36,640 Total revenue Expenditures: Professional and consultant services Park land acquisition Playground equipment Land easement Police vehicles - equipment Park fencing Fire protection Youth service bureau Shade trees Valley View Park improvement Office equipment Public works vehicles City hall expansion Sanitation and waste Other Total expenditures Balance - December 31, 1983 $447,9 $ 42, $ 2,616 $ 78,578 6,648 5,750 42,818 23,052 3,498 11,708 16,380 50,945 5,412 27,650 75,000 30,000 1,013 $378,452 $ 58,314 In 1983, the Revenue Sharing Regulations were amended to require recipients to comply with the administrative requirements of the Revenue Sharing Handicapped Regulations which were previously deferred. The requirements which effect the City of Oak Park Heights are as follows: 7,340 3,000 3,294 37,000 130 490,146 $ 2,616 78,578 6,648 5,750 50,158 23,052 3,498 14,708 16,380 50,945 8,706 27,650 75,000 67,000 1,143 $ 53,380 431,832 Requirement Deadline _ • Publish a statement that recipient does not January 17, 1984 discriminate against handicapped persons. • Conduct a self - evaluation. October 17, 1984 • Make necessary nonstructural changes to assure October 17, 1984 program accessibility. • Prepare a transition plan where structural October 17, 1984 changes are necessary. 7,340 3,000 3,294 37,000 130 490,146 $ 2,616 78,578 6,648 5,750 50,158 23,052 3,498 14,708 16,380 50,945 8,706 27,650 75,000 67,000 1,143 $ 53,380 431,832 City of Oak Park Heights Management Report, Page 23 The City should have received information on the above requirements from the Office of Revenue Sharing. The City did publish the above required statement in January, 1984. In addition to the above changes, revenue regulations were amended to eliminate the requirement that a proposed use hearing be held for the use of entitlement funds. The City is now only required to hold a budget hearing on Revenue Sharing entitlements. We recommend that the City review the revised requirements in detail and establish proce- dures to comply with the various Federal regulations now being imposed. We are available to discuss the above changes and assist the City to meet them. Debt Service Funds The financial statements for the City's Debt Service Fund is presented in Statements 10 and 11 of the 1983 Annual Financial Report. Debt Service Funds are governmental type funds used to account for the accumulation of resources to provide payment of principal and interest on general debt. The City has one general debt bond outstanding, Storm Sewer Bonds of 1982. These bonds were issued to provide financing for the Storm Sewer District construc- tion. The City Council established this district in October, 1982 per City ordinance 1600. A projection of the final fund position based on scheduled levies and debt requirements is as follows: Fund Balance - December 31, 1983 $ 1,591 Additions: Future scheduled tax levies 4 Total 488,590 Deductions: Debt requirements: Principal 205,000 Interest 258,783 Total 463,783 Projected Fund Balance $ 24,807 Normal Projected Fund Balance - 5% of debt requirements $ 23,200 City of Oak Park Heights Management Report, Page 24 The cash flow of this fund is such that the bond principal and interest payments are due one month prior to the receipt of the property tax levy. This fund will therefore incur cash deficits in the months of May and November equal to the semi - annual payment. We recommend that the City monitor this situation and provide timely financing of bond principal and interest payments as they become due. Capital Project Funds The financial statements for the Capital Project Funds are presented in Statements 12 and 13 of the City's 1983 Annual Financial Report. The City had two Capital Project Funds at December 31, 1983. Capit Improve Fu nd The Capital Improvements Fund was established in 1978 to account for monies set aside for capital improvements as follows: Municipal Building Exp ansion Revenue and Other Sources: Transfers from General Fund: 1978 through 1980 $ 70,000 1981 1982 1983 Total transfers Sale of property Donation Interest allocated to specific functions Total revenue and other sources Expenditures and Other Uses: Transfers out: Municipal building expansion Direct expenditures Sub -total 70,000 9,414 13,619 93,033 Sealcoat and Curb $ 40,000 20,000 20,000 20,000 100,000 100,000 (91,438) (1, 595) (70,602 $ -0-� $ 29, Add: Unallocated interest earnings Fund balance - December 31, 1983 Recreation Total $ 7,500 $ 117,500 2,500 22,500 6,075 26,075 2,500 22,500 18,575 188,575 9,414 750 750 2,621 16,240 21,946 214,979 (91,438) (21,946 (94,143 $ -0 = 29,398 10,1 $ 39,539 City of Oak Park Heights Management Report, Page 25 In 1983, the City council allocated a portion ($2,621) of the unallocated interest earnings to Recreation for the Brekke Park Grading Project. The balance remaining at December 31, 1983 is designated as follows: Seal coating $ 29,398 Unallocated (interest earnings) 10,141 Total $ 39,5 Storm Sewer_ Drainage Improvement This fund was created in 1982 to account for storm drainage improvements which were approved for construction during 1982. Costs incurred through December 31, 1983 total $227,351. This project is financed by the $205,000 Storm Sewer Bonds of 1982. Activity of this fund from inception to December 31, 1983 is as follows: Bond proceeds Interest on investments Other City participation Total amount available Construction Costs: Contractor Engineering Legal Other Total Fund Balance (Deficit) - December 31, 1983 $ 181,482 5,976 11,295 198,753 181,292 35,795 5,339 4,925 227,351 $ (28,598 Options to fund the above deficit have been presented to the City as follows: 1. Negotiate a supplemental bond issue. 2. Sell an internal bond issue. 3. Finance deficit through a transfer or loan from the City's General Fund. On January 25, 1984, the City approved the third option. We recommend that terms of repayment be established and that such repayments be recorded on the accounting records of the City in a timely manner. City of Oak Park Heights Management Report, Page 26 Special Assessment Funds The combining financial statements for the Special Assessment Funds are presented in Statements 14 and 15 of the City's 1983 Annual Financial Report. A Special Assessment Fund is organized to account for both the construction and financing of assessable improvement projects. During 1982, the City prepared a "Special Assessment Debt Service Study ". The cash flow schedules were computer generated which allowed for presentation of various optional schedules. The report should be used to monitor actual results versus pro- jected results. The reports should be updated in the future when actual results vary materially from projected results. Special Assessment Debt Service Funds are established by bond sale resolutions and must legally exist during the period the bonds are outstanding. During that period, these funds collect revenues to pay the principal and interest on bonds in a timely manner. The primary sources of revenue for these funds is special assessments charged to benefiting property owners and general debt tax levies. The assessments recover construction costs over the term of the assessment roll plus interest at specified rates. In addition, these funds commonly collect revenue from interest on investments, general property taxes, and other designated sources. All monies of the Special Assessment Debt Service Funds are committed to debt retirement until the City's obliga- tion is satisfied. These monies are not available for any other City purpose until debt maturity. The combination of the various projected revenue sources along with the scheduled debt service payments formed the basis for the financial projections contained in the Special Assessment Debt Service Study. The study was prepared based on assumption of various collection rates for tax levies and special assessments and interest on invest- ments. Actual collection rates on taxes were 100% and 98% for 1983 and 1982 respec- City of Oak Park Heights Management Report, Page 27 tively. Assessment collections for 1983 include a substantial recovery of prior delinquent balances (see earlier commentary "special assessments "). These variances along with variances on investment yields should be monitored by the City to determine if the projections are still valid. The following schedule compares the actual cash balance to the projected cash balance as of December 31, 1983. Cash and Investment Balance Debt Service Accoun Improvement Bonds of 1967 G.O. Storm Sewer Bonds of G.O. Improvement Bonds of G.O. Improvement Bonds of G.O. Improvement Bonds of t _ and 1968 1971 1976 1977 1978 and 1979 12/31/83 _ Actual Proj $856,283 $785,809(1) 29,904 26,796(2) 84,487 77,356(1) 57,038 33,582(2) 78,337 70,212(2) (1) The projected balance is based on: 7% Investment Rate 90% Collection on Assessments Full Cancellation of Property Taxes (2) The projected balance is based on: 7% Investment Rate 95% Collection Rate on Assessments 95% Collection Rate on Taxes Variance Final Favorable Bond ( Unfavorable ) Maturit $ 70,474 1998 3,108 1991 7,131 1986 23,456 1983 8,125 1984 As shown above, the actual cash balances are exceeding the projected balance, at the above projection assumptions. The favorable variances are due to: • Tax collection rates greater than 95 %. • Interest earnings higher than projected. • Assessment collections in excess of 90% and 95 %. The Improvement Bonds of 1967 and 1968 variance of $70,474 is primarily due to an increase in investment interest earnings over projected. The G.O. Improvement Bonds of 1977 variance is primarily due to the collection of delinquent assessments during 1983. City of Oak Park Heights Management Report, Page 28 We recommend that the City, on an annual basis, compare and monitor the projected cash position contained in the report to actual cash balances. Variances between actual and projected balances should be analyzed to determine the reasons for the variance. When these variances become significant, the City should have the Special Assessment Debt Service Study updated. G.O. Improvement Bo of 1977 The G.O. Improvement Bonds of 1977 final bond maturity was paid in 1983. The remaining balance in this fund can be transferred to another City fund at the discretion of the City Council. We recommend that the City plan for the use of this remaining balance. One option is to use this to establish a closed bond fund. This fund may be used to finance deficits of other special assessment debt service funds or may be used to finance minor projects for which bonding is not cost effective. The monies in this type of fund are not restricted to transfer within the Special Assessment Fund type. The Council may elect to use the residual monies for any governmental purpose. We recommend that the City establish a Closed Bond Fund in 1984 and transfer the residual balances of the G.O. Improvement Bonds of 1977 Fund and (upon final payment) the G.O. Improvement Bonds of 1978 and 1979. Impr ovement Bonds of 1982 The Improvement Bonds of 1982 were sold to finance water and sewer improvements for the City's Anderson /Lindquist project. The project was assessed in 1983. A comparison of estimated to actual assessments is as follows: Estimated roll per bond resolution $ 127,000 Roll adopted 9 0,400 Under assessed to estimated roll $ 36,600 City of Oak Park Heights Management Report, Page 29 The projected cash position of this fund is as follows: Assumptions Projected Cash Position (Overdraft) assuming interest earnings of: 5% 7% 9% Full levy of scheduled property taxes and a 95% collection rate for special assessments and property taxes: Projection before investment interest Projected investment interest Projected cash position (overdraft) - December 31, 1994 $ (60,869) $ (60,869) $ (60,869) 46 71 96 $ (60,823 $ (60,798 $ (6 0,773 ) Full levy of scheduled property taxes and a 90% collection rate for special assessments and property taxes: Projection before investment interest Projected investment interest Projected cash position (overdraft) - December 31, 1994 $ (71,289) $ (71,289) $ (71,289) 41 64 86 $ (71,24 $ (71,22 $ (71,203 The above projections indicate that this fund will not have sufficient assets to meet debt obligations. The first cash overdraft is projected to occur starting in 1985. Additionally, a portion of the assessments adopted in 1983 are under appeal by the pro- perty owners. The City should monitor this appeal and provide additional supplemental financing (if required) as a result of the assessment appeals. Options available to fund the anticipated deficit include: • Cash transfer from a closed special assessment bond fund. • Cash transfer from other City Council designated fund. • Re- designation of property tax levies (i.e., lower the tax levy of a special assessment debt service fund which has a projected surplus and add a supplemen- tal property tax levy for this fund). We recommend that the City monitor this fund to insure that sufficient assets are available to meet bond principal and interest requirements as they become due. We will assist the City in selecting an alternative during the 1984/85 budget process. City of Oak Park Heights Management Report, Page 30 Special Assessment Construction Accounts The financial statements for these funds are presented in Statements 14 and 15 of the 1983 Annual Financial Report. The City maintained the following construction funds during 1983 and 1982. Comp leted Constructio This fund was established in 1977 by closing several construction accounts to one account. This account has a fund balance of $90,252 at December 31, 1983. The fund balance is composed of the following assets: Cash w Adjusted $ 51,220 Special Assessments Receivable 39,032 Total $ 90,252 The above cash balance is available to be used by the City for Council designated purposes. Prison Utilities This project was completed at December 31, 1981. The deficit of $7,856 consisted of oversizing of pipe and other minor costs not billed to the State of Minnesota. This fund also has a receivable from the State of $7,191. The City is in contact with the State in an attempt to collect the full balance of the receivable at December 31, 1983. We recommend that this account be closed upon final accounting with the remaining unfunded costs being financed by a 1984 cash transfer from the General Fund. Council action is required to effect this account closing and related cash transfer. Fun Balance (Deficit) _ De 31, Increase Description 1983 1982 (Decrease) _ Interim Construction $ (4,190) $ -0- $ (4,190) Completed Construction 90,252 89,210 1,042 Prison Utilities (7,856) (11,603) 3,747 1979 Utilities 7,097 (23,713) 30,810 1982 Water and Sewer (28,969) 59,512 (88,481) 1983 Improvements 22,089 _ 22,089 Totals $ 78,423 $ 113 ,406 $ (34,983 Comp leted Constructio This fund was established in 1977 by closing several construction accounts to one account. This account has a fund balance of $90,252 at December 31, 1983. The fund balance is composed of the following assets: Cash w Adjusted $ 51,220 Special Assessments Receivable 39,032 Total $ 90,252 The above cash balance is available to be used by the City for Council designated purposes. Prison Utilities This project was completed at December 31, 1981. The deficit of $7,856 consisted of oversizing of pipe and other minor costs not billed to the State of Minnesota. This fund also has a receivable from the State of $7,191. The City is in contact with the State in an attempt to collect the full balance of the receivable at December 31, 1983. We recommend that this account be closed upon final accounting with the remaining unfunded costs being financed by a 1984 cash transfer from the General Fund. Council action is required to effect this account closing and related cash transfer. City of Oak Park Heights Management Report, Page 31 1979 Utilities The 1979 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 $ 96,982 Interest on special assessments 12,462 Cash transfers from Water and Sewer Utilities 27,583 Cash transfers from General Fund 28,0 Total 165,027 Construction costs: Sunview $ 24,247 Valley View (storm sewer) 105,323 Other 28,360 157,930 Fund balance -° December 31, 1983 $ 7,097 The City provided additional financing of this fund by a budgeted cash transfer of $28,000 from the General Fund in 1983. We recommend that this account be closed in 1984 with the remaining net assets being transferred to the Completed Construction account. Council action is required to effect this account closing and related transfer of assets. 1982 Sew and Water Improvement The Sewer and Water Improvement Fund was established in 1982 to account for the Anderson /Lindquist: Water and Sewer Extensions. The project is being financed by develo- pers and the $165,000 Improvement Bonds of 1982. Activity of this fund is as follows: Bonds proceeds Interest on investments Reimbursement - NSP Direct charge to property owners Total amount available Construction Costs: Contractor Engineer Other Total $ 143,616 7,915 80,633 26,298 258,462 244,917 34,136 8,378 287,431 Fund Balance (Deficit) - December 31, 1983 $ (28,96 City of Oak Park Heights Management Report, Page 32 The above deficit is the result of construction costs incurred in excess of original estimates (i.e., bond proceeds and other sources were inadequate to finance the construction costs incurred). The scope of this project was expanded (after bonding was complete) to include the following: NSP petitioned improvement $ 80,000 Developer petitioned improvement 26,000 Change order to original project 17,000 Total $ 123,000 The petitioned improvements have been charged directly to the petitioners. The change order and other (unbonded) expenditures, however, do not have a source of financing. The special assessments of this project are fully committed to the related debt service account (see previous comments) and therefore are unavailable to fund this construction deficit. One alternative is a transfer from the City's General Fund. City Council authorization is required to effect this transfer. We recommend that the City approve a method of financing this construction fund deficit during 1984. 1983 Improvements The 1983 Improvements were financed by the $80,000 G.O. Improvement Bonds of 1983 which were sold in December, 1983. Activity of this fund for 1983 is as follows: Bond proceeds $ 70,550 Interest on investments 1 88 Total available to fund construction costs $ 70,738 Construction costs 48,649 Fund balance 22,089 Less: Committed contracts (19,292 Adjusted fund balance $ 2 ,797 City of Oak Park Heights Management Report, Page 33 The City should monitor this project to insure that the construction costs are fully funded. The City should close any remaining cash balance of this fund to the related debt service fund upon project completion. Small projects of this nature may be funded internally through the use of a Closed Bond Fund (see previous comments). The advantage of internally funding projects is that bonding costs are avoided. The City should, however, consider the benefits of bonding versus internal financing in light of Minnesota Statute (MS 429.061) which limits the interest on assessments for internally bonded projects to 80. The City may be for- feiting higher interest available in the City's overall investment portfolio if such projects are internally financed. Enterp Fund The financial statements for the Enterprise Fund (Water and Sewer Utilities) are presented in Statements 16, 17 and 18 of the City's 1983 Annual Financial Report. Condensed comparative operating statements of income and expense for the utility opera- tions excluding depreciation on contributed assets of the City are as follows: Water De partment 1983 1982 Amou Percent Amount Percent Revenue: _ _ Customer billings and other $ 66, 100.00% $ 63,431 100.005 Operating expenses: Contractual services Administrative and personnel charges Other Total operating expenses Net income before depreciation Depreciation - purchased assets Net operating income 19,618 29.41 15,000 22.48 3,899 5.84 38,517 57.73 28,199 42.27% 7,669 $ 20,53 17,026 26.84 15,000 23.65 2,685 4.23 34,711 54.72 28,720 45.285 5,312 $ 23,408 City of Oak Park Heights Management Report, Page 34 Sewer Department 1983 Net income before depreciation 7,932 9.06% Depreciation - purchased assets 2,189 Net operating income $ 5,7 43 _ 1982 Amount Percent $ 74,863 100.00% 51,109 Amount Percent Revenue: 4,40 5.88 Customer billings and other $ 87,559 100.00 Operating expenses: MWCC 57,531 65.71 Administrative charges 15,000 17.13 Other 7,096 _ 8.10 Total operating expenses 79,627 90. 94 Net income before depreciation 7,932 9.06% Depreciation - purchased assets 2,189 Net operating income $ 5,7 43 _ 1982 Amount Percent $ 74,863 100.00% 51,109 68.27 15,000 20.04 4,40 5.88 70,51 94.19 4,349 5.81% 2,115 $ 2, 234 In addition to the above operating expenses, the City is retiring bonded debt of a revenue bond which reaches final maturity in 1994. Operating income is required to generate adequate cash to meet bonded debt payments. The increase in revenue in 1983 is primarily due to the City rate increase approved in the fourth quarter of 1982 and an additional increase in the fourth quarter of 1983. The City had its utility rates reviewed by the City's engineering firm during 1983. This study recommended that rates should be designed to cover costs being incurred plus amounts to be set aside for future capital replacement needs. The City increased rates based upon the utility rate review. We recommend that the City continue the review of utility rates on a periodic basis and increase rates as needed. City of Oak Park Heights Management Report, Page 35 The operating expense item which has the most impact on operations is not under direct City control. Sewer line user charges are determined by the Metropolitan Waste Control Commission (MWCC). The MWCC 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 varian- ces in annual profits or losses of the Sewer operations. The Metropolitan Waste Control Commission billings for the period 1974 through 1984 were as follows: Note: The bracketed figures above indicate payments from the MWCC. There are two basic factors which contribute to increased billings from the MWCC. The first is changes in use of the system. The estimated increased usage for 1984 over 1983 for the City of Oak Park Heights is 4.34 %. The second factor which effects the billings from MWCC is their increased cost to process gallonage. Their cost to process (per million gallons) increased from an estimated $711 for 1982 to an estimated $753 for 1983. This represents an increase of 5.9 %. The combination of these factors increased the City's estimated cost in 1984 by 10.490. As the system gains users, the increased usage part of overall increases should be offset by the billings to new users. The per unit portion of the increase, however, must be borne in full by existing users or be subsidized by overall City operations. Estimated Final Year Billing Billings 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 34,048 1982 56,553 47,736 1983 66,348 Not available 1984 75,338 Not available Note: The bracketed figures above indicate payments from the MWCC. There are two basic factors which contribute to increased billings from the MWCC. The first is changes in use of the system. The estimated increased usage for 1984 over 1983 for the City of Oak Park Heights is 4.34 %. The second factor which effects the billings from MWCC is their increased cost to process gallonage. Their cost to process (per million gallons) increased from an estimated $711 for 1982 to an estimated $753 for 1983. This represents an increase of 5.9 %. The combination of these factors increased the City's estimated cost in 1984 by 10.490. As the system gains users, the increased usage part of overall increases should be offset by the billings to new users. The per unit portion of the increase, however, must be borne in full by existing users or be subsidized by overall City operations. City of Oak Park Heights Management Report, Page 36 The MWCC charges comprise approximately 70% of sewer expenses (excluding contributed asset depreciation). The City must set rates at levels adequate to pay for the pass through cost or provide funding from other City funds. In view of this financial struc- ture and arrangement, the City's ability to exercise control over its sewer operations is limited. The City could be construed to be acting only as an agent for the MWCC with regard to sanitary sewer operations. The City must maintain an adequate level of income to: • Offset MWCC expenses (and other City expenses). • Meet bonded debt requirements ($2 2,000 to $29,000 per year). • Provide for capital replacement. • Establish a means of paying for emergency or unanticipated expenses such as major repairs. We concur with the City's efforts to comission rate studies and recommend that annual rate reviews continue to be a standard procedure for the City. Internal Accountinq Controls As part of our examination, we made a study and evaluation of the system of internal accounting control of the City of Oak Park Heights to the extent we considered necessary to evaluate the system, as required by generally accepted auditing standards. The pur- pose of our study and evaluation was to determine the nature, timing and extent of the auditing procedures necessary for the expression of an opinion on the City's financial statements. Our study was more limited than would be necessary to express an opinion on the system of internal accounting control taken as a whole or on any of the categories of controls identified. The City of Oak Park Heights is responsible for establishing and maintaining a system of internal accounting control. The objective of internal accounting control is to provide reasonable, but not absolute, assurance as to the safeguarding of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and maintaining accountability for assets. City of Oak Park Heights Management Report, Page 37 The concept of reasonable assurance recognizes that the cost of a system of internal accounting control should not exceed the benefits derived and also recognizes that the evaluation of these factors necessarily requires estimates and judgments by management. There are inherent limitations that should be recognized in considering the poten- tial effectiveness of any system of internal accounting control. In the performance of most control procedures, errors can result from misunderstanding of instructions, mista- kes of judgment, carelessness, or other personal factors. Control procedures whose effectiveness depends upon segregation of duties can be circumvented by collusion. Similarly, control procedures can be circumvented intentionally by management either with respect to the execution and recording of transactions or with respect to the esti- mates and judgments required in the preparation of financial statements. Also, projection of any evaluation of the system to future periods is subject to the risk that the procedures may become inadequate because of changes in conditions and that the degree of compliance with the procedures may deteriorate. Our study and evaluation made for the limited purpose described in the first paragraph would not necessarily disclose all material weaknesses in the system. Accordingly, we do not express an opinion on the system of internal accounting control of the City of Oak Park Heights taken as a whole. However, our study and evaluation disclosed that a substantial portion of the accounting process is performed by a single employee. Ideal conditions call for segregation of duties to establish a system of internal testing of procedures performed. Additionally, our evaluation disclosed that the City does not maintain a system of control over fixed assets. These conditions are common to cities of this size. Any modification of internal controls in these areas must be viewed from a cost /benefit perspective. City of Oak Park Heights Management Report, Page 38 These conditions were considered in determining the nature, timing, and extent of the audit tests to be applied in our examination of the December 31, 1983 financial sta- tements, and this report does not affect our report on the financial statements dated February 20, 1984. This report is intended solely for the use of the City of Oak Park Heights and should not be used for any other purpose. Financial Management Requirements The City is currently reviewing the City's accounting systems. This review is being done with the assistance of consultants as approved by the City Council in January, fiGISIS1e The process of acquiring a data processing system includes four basic phases as f ollowsc • Needs assessment. • Preparation of request for proposals. • Evaluation of proposals received. • Implementation of system. Currently, the City's data processing consultants are in the middle two phases of the project. A successful program to acquire a comprehensive data processing system will greatly enhance the City's internal capabilities. Financial management areas are scheduled to include general ledger accounting, utility billings, payroll functions, financial management forecasting (budgets), as- well -as other analytical reports. Additionally, the City will improve its ability to process data through the acquisition of word processing capabilities. Current technological advancements in these areas have greatly improved the quality and simplicity of internal data processing systems. We concur with the City's decision to study the benefits of such a system. City of Oak Park Heights Management Report, Page 39 The conversion from reliance on both manual systems and service bureau systems to an automated in -house system requires a revamping of internal control procedures. A par- tial listing of areas to review is as follows: • Input controls Including input authorization, changes to input data, input error detection controls, etc. • Process controls Including validation of data prior to processing, error detection features of systems, periodic tests of system functions, etc. ® Output controls Including tests of output for accuracy, distribution of output controls, retention of output system, etc. ® Program controls System to assure that existing programs are not altered without authorization and that authorized program changes are affected and that all programs (and all changes thereto) are properly, completely and accurately implemented. ® Sys s To assure only authorized use to the system and to safe- guard data that would otherwise be lost through error (or disaster such as fire). ® Develoizroent o f user manuals ® Schedulin of sys tems user prio rity. ® Seareaation of duties. The above areas should be (and are being) addressed by the City to assure a success- ful implementation of the overall system. These features will better assure safe- guarding of City interests and overall integrity of the system. City of Oak Park Heights Management Report, Page 40 Sum mary The following listing is a summary of the items which should be recorded, investi- gated and /or resolved during 1984. ° Continue to monitor legislative actions which can affect the financing of City government. (Page 1) ° Review security for deposit requirements and establish procedures to assure compliance. (Page 7) ° Approve transfer of interfund receivables and record other audit adjustments in the accounting records of the City. (Page 8) ° Review the benefits of establishing computerized fixed asset records. (Page 12) ° Review statutory purchasing requirements and establish internal procedures to assure compliance. (Pages 12 and 13) ° Establish prccedures to assure compliance with bond registrar requirements. (Pages 14 and 15) ° Continue efforts to monitor and maintain adequate reserve balances in the City's General Fund. (Pages 16 through 21) ° Review amended revenue sharing requirements and establish internal procedures to comply. (Pages 22 and 23) Effect repayment terms for the interfund loan from General Fund to Storm Sewer Drainage Improvement Fund. (Page 25) ° Continue efforts to monitor the projected financial position of the City's various Special Assessment Debt Service Funds and provide supplemental financing for the 1982 Improvement Bond Fund. (Pages 26 through 29) • Review financing requirements of the various Special Assessment Construction Funds and close those funds for which projects have been completed. (Pages 30 through 33) • Continue efforts to review utility rates as reported in the City's "Water and Sewer Rate Study ". (Pages 33 through 36) • Continue efforts to review internal computer systems and review corresponding internal controls effected. (saes 38 and 39) Respectfully submitted, ef 1 VOTO, REARDON, TAUTGES & CO., LTD. Certified Public Accountants April 30, 1984