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Home My WebLink AboutAudit Management Letter December 31, 2006 CITY OF OAK PARK HEIGHTS, MINNESOTA AUDIT MANAGEMENT LETTER December 31, 2006 i 1 Tautges Redpath, Ltd. Certified Public Accountants and Consultants To the Honorable Mayor and Members of the City Council City of Oak Park Heights, Minnesota We have completed the 2006 audit of the City of Oak Park Heights, Minnesota and have issued our report thereon. Our Independent Auditor's Report is included in the City's Annual Financial Report. This Management Letter provides a summary of audit results along with comparisons and trend analysis of financial results. Thank you for the opportunity to serve the City. We are available to discuss this report with you. HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota April 16, 2007 4810 White Bear Parkway White Bear Lake, Minnesota 55110 651 426 7000 651 426 5004 Fax www.hlbtr.com 1303 South Frontage Road Suite 13 Hastings, Minnesota 55033 651 480 4990 651 426 5004 Fax — HLB Tautges Redpath, Ltd is a member of M International, a world -wide organization of accounting firms and busmess advisors City of Oak Park Heig Minnes Audit Management Letter Report Summary REPORT SUMMARY Several reports are issued in conjunction with the audit. A very brief summary is as follows: Report Name Elements of Report Overview Annual Financial Report (AFR) • Financial statements • Unqualified ( "clean ") • Footnotes opinion on the Financial • Required supplementary Statements information • Statistical information Report on Internal Control and on Results of testing • No findings of -- Compliance and Other Matters • Internal controls over financial noncompliance reporting • Three deficiencies in • Compliance with laws, internal control. regulations, contracts and grants State Legal Compliance Report • Results of testing certain • No findings of provisions of Minnesota noncompliance Statutes Audit Management Letter Intended to be a working tool for City Council • Comparisons and trend analysis �- • Outside factors influencing City financial reporting • Policies and procedures City of • Park Heights, Minnesota Audit Management Letter Statement of Activities Statement of Activities One of the financial statement presentations required by GASB 34 is the Statement of Activities. This schedule presents the net cost of providing various activities and the extent to which these activities are funded by property taxes, and investment earnings. Program Revenues Net (E)Rense) Revenue and Operating Capital Changes in Net Assets Charges For Grants and Grants and - Governmental Business -Type Functions /Proerams Expenses Services Contributions Contributions Activities Activities Total ttcterest on AdtninChargesto per ita Strap g terpriselrtsids fines i9d` Governmental activities: General government $987,597 $85 -315 $ $ ($902,282) $ ($9(12,282) Public safety 1,226,042 456.332 71081 (697,629) (697,629) Public works 755.989 1.819396 1.599 40.397 1,105,403 1,105,403 Parks and recreation 152.899 1.004.240 425 ' ' 125,000 ; 976,766 976,766 Interest on long -term debt= 43.965 - (43,965) (43,965) Total governmental activities 3,166,492 3.365,283 74,105 165,397 438293:. 0 _ 438,293 „ v - Business -type activities: Water; 398,766 - 502.407 -' 103,641 t 103,641 Sanitary sewer 661,367 767 105,840 ? 105,840 Storm sewer 65,149 74,173 9,024 9,024 Sanitation 147,565 97,266 (50,299)' (50,299) Total business-type activities 1,272.847 1.441.053 0 0: ' 0 168,206 168,206 Total $4,439,339 $4,806.336 $74.105 < $165,397: 438,293 168,206 606,499 General revenues: _ General property taxes 2,417,014_ 2,417,014 Grants and contributions not restricted to specific programs 29,838 29,838 Unrestricted investment earnings 425,160 49,037 474,197 Gain on sale ofcapital assets 244,099 - 2 Other 16,254 - 16,254 Transfers 101,917 (101,917) - ... Total general revenues and transfers 3,234,282 (52,880) 3,181,402 Change in net assets 3,672,575 1 15,326 3,787,901 Net assets - beginning 18,998,645 7,093,419 26,092,064 Net assets - ending $22,671,220 $7,208,745 - $29,879,965 i Includes General Fund, Special Revenue, Debt Service and Capital Project Funds. City o f . P H r Minnes Audit Management Letter ._ Analysis of Selected Accounts ANALYSIS OF SELECTED ACCOUNTS Summary of Financial Activitv The schedule below presents a condensed financial summary of all funds: _ All Funds Financial Summary - 2006 Increase (Decrease) in Fund Balance/ Revenue Expenditures Fund Balance/ Net _ and Other and Other Transfers Net Assets Fund Sources Uses (Net) Assets 12/31/06 General $3,148,673 $2,401,234 ($548,680) $198,759 $2,302,502 Special Revenue Funds: Forfeiture and Seizure 16,061 7,392 8,669 30,788 Economic Development 2,380 444 - 1,936 55,538 Debt Service Funds: Bonds of 1998 520,565 167,812 55,000 407,753 512,829 Bonds of 2002 4,331 66,723 - (62,392) 47,315 Capital Project Funds: Capital Revolving 277,597 12,452 - 265,145 723,527 -� Budgeted Projects and Equipment Revolving 239,369 271,507 332,900 300,762 1,033,981 Street Reconstruction 25,132 - 152,180 177,312 688,138 Brekke Park Memorial 113 - - 113 350 McKean Square 105 105 - - - "` Oakgreen Avenue Utilities 140,504 204,456 63,952 - - Water Tower Rental 25,631 - - 25,631 57,573 Park Development 1,038,374 628,036 - 410,338 769,057 Renewal and Replacement 117,872 - 165,517 283,389 2,928,984 Novak Avenue Street and Utility Improvements 797,689 797,689 - - - Sanitary Sewer Connection 171,068 - (91,727) 79,341 476,280 Water Connection 435,155 - (9,625) 425,530 667,284 Storm Sewer Connection 295,818 126,099 (17,600) 152,119 882,414 Enterprise Funds: Water 526,410 398,766 (99,021) 28,623 3,737,112 Sanitary Sewer 786,966 661,367 (88,096) 37,503 3,314,440 Storm Sewer 79,191 65,149 (3,300) 10,742 132,489 Sanitation 97,523 147,565 88,500 38,458 24,704 Total $8,746,527 $5,956,796 $0 $2,789,731 $18,385,305 City o f . P H Minnes Audit Management Letter Analysis of Selected Accounts Proaerty Taxes Property taxes receivable consist of taxes levied in the previous seven years by the City �. but not yet collected by the County and remitted to the City. The collection rate on property taxes remains strong as illustrated below. 2003 2004 2005 2006 Tax levy certified $1,993,003 $2,054,070 $2,293,825 $2,474,455 Less market value homestead credit (88,486) (88,534) (85,647) (79,411) Net levy 1,904,517 1,965,536 2,208,178 2,395,044 Receipts: Current property taxes 1,891,046 1,938,726 2,176,290 2,363,192 _. Delinquent property taxes 12,386 12,016 20,627 35,587 Total receipts 1,903,432 1,950,742 2,196,917 2,398,779 Adjustments 10,293 (4,714) (7,830) (2,497) Increase (decrease) in delinquent taxes receivable 11,378 10,080 3,431 (6,232) Delinquent taxes - January 1 20,174 31,552 41,632 45,063 Delinquent taxes - December 31 $31,552 $41,632 $45,063 $38,831 Current collection as a percent of current levy 99.3% 98.6% 98.6% 98.7% Total collections as a percent of current levy 95.5% 99.2% 99.5% 100.2% ( ' ) MVHC was not paid by the State to the City. "' City o f O P H Minnes Audit Management Letter Analysis of Selected Accounts Tax Levies, Tax Rates and Tax Capacity A comparison of values for taxes payable in 2005, 2006 and 2007 is as follows: 2005 2006 2007 Market value $485,026,700 $529,099,400 $579,089,800 _ Tax capacity values: Real estate $6,840,470 $7,401,815 $8,383,673 Personal property 78,460 84,133 88,065 Subtotal 6,918,930 7,485,948 8,471,738 Fiscal disparity contribution (954,578) (1,037,753) (1,115,215) Fiscal disparity distribution 341,985 395,515 445,352 Total $6,306,337 $6,843,710 $7,801,875 Tax capacity rates 36.488 36.136 35.731 Tax levy $2,293,825 $2,474,455 $2,789,655 ( ' ) Proposed values _ _ �Y City of Oak Park Heig Minnes Audit Management Letter Analysis of Selected Accounts A schedule of tax capacity by classification is as follows: CITY OF OAK PARKS HEIGHTS 2007 2005 Percent of Percent of Amount City Total Amount City Total Real estate: ,.., Agricultural $8 0.0% $21,284 0.3% Seasonal 1,979 0.0% 2,803 0.0% Residential homestead 2,332,924 27.5% 2,188,765 31.6% Residential nonhomestead 983,149 11.6% 719,161 10.4% Commercial /industrial 3,328,632 39.3% 2,526,858 36.5% Public utility 1,733,703 20.5% 1,378,249 19.9% Railroad 3,278 0.0% 3,360 0.0% Total real estate 8,383,673 99.0% 6,840,480 98.9% Personal property 88,065 1.0% 78,460 1.1% Total tax capacity $8,471,738 100.0% $6,918,940 100.0% Tax Capacity by Property Class - 2007 Agricultural 0.3% Public Utility 19.9`x, Residential ^ Homestead 316% ;N Cy'at � CommerciaVIndustrial 36.9 Residential Nonhomestead I0.4% r. City of Oak Park Heights, Minnesota Audit Management Letter Analysis of Selected Accounts Bonds Pavable The City had one bond issue outstanding at December 31, 2006. A summary of the 2006 activity of each bond issue is as follows: General General Obligation Obligation Improvement Refunding Bonds Bonds of 1998 of 2002 Totals Balance - January 1, 2006 $1,000,000 $65,000 $1,065,000 Bonds issued - - _ Principal payments (125,000) (65,000) (190,000) Balance - December 31, 2006 $875,000 $0 $875,000 Maturity date 12/1/2013 Repayment source Special assessments _ and connection charges City of Oak Park Heights, Minnesota Audit Management Letter General Fund GENERAL FUND The General Fund of the City is maintained to account for expenditures common to all cities (general government, public safety, public works, and parks and recreation). A history of major revenue sources that support the General Fund are as follows: Property Taxes State Aids All Other Total Revenue Year Amount Percent Amount Percent Amount Percent Amount Percent 1996 $1,390,443 66% $119,274 6 %n $581,850 28% $2,091,567 100% 1997 1,387,227 65% 137,951 6% 619,874 29 %n 2,145,052 100% 1998 1,479,490 69% 133,484 6% 529,143 25 %n 2,142,117 100% 1999 1,333,194 62 %n 139,875 7% 674,762 31% 2,147,831 100% 2000 1,405,002 62 %n 145,514 6% 712,026 32% 2,262,542 100% 2001 1,524,300 66% 142,292 6% 631,284 28% 2,297,876 100% 2002 1,748,634 71% 160,381 6% 566,938 23 %n 2,475,953 100% 2003 1,859,203 71% 60,410 2% 706,210 27% 2,625,823 100% 2004 1,910,848 72% 61,479 2 % 671,683 26% 2,644,010 100% 2005 2,218,213 71% 78,137 3% 819,616 26% 3,115,966 100% 2006 2,423,246 77% 92,370 3% 633,057 20% 3,148,673 100% 2007* 2,809,655 84% 91,024 3% 462,655 13% 3,363,334 100% *Budgeted Major Revenue Sources - 2006 State Aids 3% Other 26% Property Taxes 71% Y City of O ak P ark Heights, Minnesota Audit Management Letter General Fund A graph of property taxes, state aids, and other revenue for the General Fund is as follows: $2.6(x).(XX) $2.40000 - General Fund Revenue by Source $2.(XN).(NX) $I,RIN),INX) $1.6(N),W0 State Aids ✓_ f All Other �- 1-4E- Property Taxes $1.2000x) - - -_ $1,0W OM $800.0(X) \ $60().0(X) $400,M) $2(X),(XX) Jt e \ 1996 1997 1998 1999 20(X) 2(X11 21X)2 2(X)3 2004 2005 2(x)6 ..r State Aids State aids of the General Fund have consisted of the following for the past six years (with 2007 budget): 2007 State Aid 2001 2002 2003 2004 2005 2006 Budget H.A.C.A. $79,603 $ - $ - $ - $ - $ - $ Market value homestead credit - 97,935 - - LGA 4,878 4,881 - - - 27,798 27,984 Police aid 53,650 55,525 58,370 58,419 61,097 62,532 61,000 Other state revenue 4,161 2,040 2,040 3,060 17,040 2,040 2,040 Totals $142,292 $160,381 $60,410 $61,479 $78,137 $92,370 $91,024 Change $18,089 ($99,971) $1,069 $16,658 $14,233 ($1,346) % Change 13% (62 %) 2% 27% 18% (1 %) City o f . P H Minnes Audit Management Letter General Fund _ Other General Fund Revenue Other revenue of the General Fund has consisted of the following for the past five years -. (with 2006 budget): 2007 Description 2002 2003 2004 2005 2006 Budget Licenses and permits $183,596 $313,273 $304,594 $365,512 $306,266 $187,605 Charges for services: Refuse charge - Junker settlement 28,460 52 - - - - Enterprise 89,780 87,205 90,860 94,140 64,465 63,200 Construction/engineering fee 2,083 14,613 - 5,859 2,354 - Other 23,706 18,455 8,929 31,251 11,946 5,000 .� Inspections 44,064 88,751 50,337 84,719 - - Fines and forfeits 63,211 61,146 78,274 69,850 81,230 60,500 Earnings on investments 32,052 32,067 39,188 55,431 79,610 65,000 Other 99,986 90,648 99,501 112,854 87,186 81,350 Total $566,938 $706,210 $671,683 $819,616 $633,057 $462,655 Administrative Fee - Enterprise The administrative fee is designed to reimburse the General Fund for overhead costs only. Beginning in 2006, the overhead was reduced from 10% to 7 %. Additionally, beginning in 2006 the Sanitation Fund will not be charged an administrative fee. City of Oak Park Heights, Minnesota Audit Management Letter General Fund Administrative Fee - Capital Proiects The City's General Fund incurs costs related to capital improvement projects. These costs include staff time, supplies, and other overhead items. The City established a l' /s% administrative fee to recover these costs effective January 1, 1999. The administrative fee is charged to a project with the corresponding revenue receipted in the General Fund. The fee is charged at project inception and is based on the contract awarded. During 2006, one project, Oakgreen Avenue Utilities, was charged an administrative fee of $2,354. .. Budget Versus Actual Comparison The General Fund balance increased by $198,759 as the result of positive budget variances primarily relating to revenue as follows: Budget Actual Variance Revenue $2,927,781 $3,148,673 $220,892 Expenditures /transfers out 2,927,772 2,949,914 (22,142) Increase (decrease) in fund balance $9 $198,759 $198,750 City of Oak Park Heights, Minnesota Audit Management Letter General Fund General Fund — Long Term Commitments During 1996, the City approved a pledge of $200,000 to the St. Croix Sport Facility Commission. A summary of the activity related to this pledge is as follows: Year Payments Balance Beginning balance $200,000 1998 $50,000 150,000 1999 15,000 135,000 2000 15,000 120,000 2001 15,000 105,000 2002 15,000 90,000 2003 15,000 75,000 2004 15,000 60,000 2005 15,000 45,000 2006 15,000 30,000 The remaining amount will be paid in annual installments of $15,000. City o f O P H Minnes Audit Management Letter General Fund General Fund Reserves The fund balance of the General Fund increased in 2006. The schedule below reflects the General Fund balance for the past ten years: ... Year Ended Fund Increase December 31, Balance (Decrease) 1996 $1,312,593 1997 1,246,347 (66,246) 1998 1,186,663 (59,684) 1999 1,191,081 4,418 2000 1,280,101 89,020 2001 1,173,118 (106,983) 2002 1,329,229 156,111 2003 1,694,611 365,382 2004 1,847,608 152,997 2005 2,103,743 256,135 2006 2,302,502 198,759 Fund Balance $2,400,000 l $2,200,000 / _ $2,000,000 $1,800,000 / $1,600,000 f �•/ t Actual Fund Balance : $1,400,000 -�- Desired Fund Balance "''� $1,200,000 $1,000,000 $800,000 $600,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 City of Oak Park Heig Minnes ^ Audit Management Letter General Fund Reserve balances are an important component of City financial management. When evaluating the adequacy of reserve balances, there are a number of important factors that must be considered. Several areas to consider are illustrated as follows: Cash Flow Timing Difference Favorable bond rating Supplements revenues indicator with investment income Intergovernmental Capital Outlay Revenue Cutbacks Replacement .-. - it Provides resources for Avoids temporary minor prgecls or - overdrafts prior to major feasibility reports - receipts r"k I II �lliyl� I , Provides the City I Avoids overburdening Emergency or greater optrons to deal of annual budgets for Unanticpated Special with unexpected events certain capital outlay ,..� Expenditures Projects i City of Oak • Minnesota Audit Management Letter ._ General Fund In 1987, the City adopted Resolution 87 -10 -42 establishing General Fund reserves/ designations for cash flow, employee benefits and general contingency based upon formulas for each category. The formula for the designation for contingent employee benefits was amended by the City Council on December 11, 2001. At December 31, 2005 and 2006, the General Fund balance was reserved or designated as follows: General Fund Balance December 31, 2005 2006 Designated for: Cash flow $1,237,000 $1,409,000 Contingent employee benefits 141,533 169,633 General contingency 439,000 493,000 ... Subtotal - designated 1,817,533 2,071,633 Undesignated 286,210 230,869 Total fund balance $2,103,743 $2,302,502 City of Oak Park Heig Minnes ^ Audit Management Letter General Fund Cash Flow Reserve Property taxes and related state aids account for approximately 75% of the revenue of the �. General Fund. Property taxes and local government aid are not received until July and December of each year (i.e., the second half of the year). Market value homestead credit is not received until October and December of each year. As a result, the City is required to have sufficient reserves at the beginning of the year to fund operations of the first half of the year. For the City of Oak Park Heights, the recommended cash flow reserve is $1,409,000, computed as follows: Cash Flow Reserve 2007 tax levy (includes market value homestead credit aid $2,789,655 2007 anticipated local government aid 27,984 $2,817,639 Recommended reserve (one -half of tax levy and state aids) $1,409,000 City of Oak Park Heights, Minnesota Audit Management Letter General Fund The following graph of monthly General Fund cash balances illustrates the impact of receiving property taxes and state aids in the second half of the year: i $1200,0(X) General Fund Monthly Cash Balances $2.INN),INN) $1,80(I,IIIN) $770,000 decrease $1,600,0)(N) $1,400,0(X) $1,200,11191 $I,IN)II,UIN) $8()0,()(X) $600.000 - $4(X),(100 $2(N),INXI 121312(X15 1/31/2(X)6 22820()6 3/312(X)6 4/302(X16 5 /212 (XNi X30/2006 7!312006 8(.312006 9/302(X)6 ]0312006 W30/2006 12,'312006 IRS—] $2,035,524 $1,883,790 $1.762.279 $1,654,577 $1.484,417 1 $1,588,984 I $1,264.817 $2,200,469 1$2,090,660 1 $1,986,431 1 $1,814,327 1$1,667,016 1$2,229,287 ,r As shown above, the cash balance decreased $770,000 between January 1 and June 30, illustrating the need for the cash flow reserve. City of Oak Park Heights, Minnesota Audit Management Letter General Fund Contingent Emplovee Benefit Reserve The employee benefits reserve is computed based upon accrued, but unpaid, employee r ` benefits as follows: Employee Benefits Reserve December 31, Employee Benefit 2005 2006 Vacation leave carryover $24,713 $31,650 Severance 116,820 137,983 Total $141,533 $169,633 This reserve was established to recognize the actual/potential liability for vacation and sick leave. When the reserve was established, a conservative approach was taken in which an amount equal to all vacation leave, all severance and twenty -five percent of the sick leave -- balance was deemed the appropriate reserve amount. History had shown that this level of reserve is not required. The City amended this reserve component to an amount equal to 50% of vacation leave, 100% of severance and 0% of sick leave. City of Oak Park Heights, Minnesota Audit Management Letter .- General Fund General Contingencv Reserve The amount of General Fund reserve required to meet emergency and /or unanticipated expenditures is not readily quantifiable. Rather, the level of this requirement must be established by the City based on the history of the City and the philosophy of "adequate" reserve coverage. Currently, the City of Oak Park Heights has set this reserve equal to 15% of the General Fund operating budget subject to availability of such amounts, as follows: General Contingency Reserve December 31, Description 2005 2006 Ensuing year's budget $2,927,772 $3,283,930 Reserve amount @ 15% $439,000 $493,000 r , -� City of Oak Park Heig Minnes ^ Audit Management Letter Special Revenue Funds SPECIAL REVENUE FUNDS Special Revenue Funds are a classification of funds to account for revenues (and expenditures related thereto) segregated by City policy, Federal or State statutes for specific purposes. The City maintained two Special Revenue Funds during 2006. Forfeiture and Seizure Fund This fund was established in 1991 to account for property forfeited pursuant to MS 609.531. A summary of the financial activity of this fund from inception is as follows: Prior Years 2006 Total ^ Revenue: Intergovernmental - bulletproof vests $7,170 $2,655 $9,825 Earnings on investments 8,664 1,121 9,785 Reimbursements 4,029 3,385 7,414 Confiscated property 99,738 8,900 108,638 Sale of municipal property 5,046 - 5,046 _. Total revenue $124,647 $16,061 140,708 Expenditures: Public safety: Materials and supplies $33,578 $4,009 37,587 Contractual services 12,378 3,383 15,761 Capital outlay 56,572 - 56,572 Total expenditures $102,528 $7,392 109,920 Fund balance - December 31, 2006 $30,788 The use of these funds is restricted by MS 609.531 subd. 5 to "supplement the agency's operating fund or similar fund for use in law enforcement." City of Oak Park Heights, Minnesota Audit Management Letter ,. Special Revenue Funds Economic Development Fund This fund was established in 1998 to account for the activity of the Oak Park Heights Economic Development Authority. A summary of the financial activity of this fund is as follows: Prior Years 2006 Total Revenue: Earnings on investments $23,988 $2,380 $26,368 Interfund loan interest 1,113 - 1,113 Refunds and reimbursements 2,531 - 2,531 Sale of municipal property 76 - 76 Transfer from Capital Revolving Fund 260,000 - 260,000 Total revenue $287,708 $2,380 290,088 Expenditures: Community development: Materials and supplies $457 $ - 457 Contractual services 31,036 444 31,480 Interfund loan interest 70,000 - 70,000 Capital outlay 121,500 - 121,500 Transfer to Capital Revolving Fund 11,113 - 11,113 Zia Total expenditures $234,106 $444 234,550 Fund balance - December 31, 2006 $55,538 During 1998, the City purchased the Bell property and demolished the building in 1999. In prior years, this fund had a deficit that was funded by a $260,000 interfund loan from the Capital Revolving Fund. This fund did not have the resources to repay the interfund loan. Therefore, the interfund loan was forgiven. If a sale of the Bell property occurs, the proceeds should be receipted in the Capital Revolving Fund. City of Oak Park Heights, Minnesota Audit Management Letter Debt Service Funds DEBT SERVICE FUNDS /f4 The financial statements for the G.O. Improvement Bonds of 1998 are presented in Statements 3 and 4 and the financial statements of the G.O. Refunding Bonds of 2002 are presented in Statements 15 and 16 of the 2006 Annual Financial Report. Debt Service Funds are a type of governmental fund to account for the accumulation of resources for the payment of interest and principal on debt (other than Enterprise Fund debt). The City maintained two Debt Service Funds during 2006 as follows: Fund Balance December 31, Increase Fund 2005 2006 (Decrease) G.O. Crossover Refunding Bonds of 1993 / Refunding Bonds of 2002 $109,707 $47,315 ($62,392) G.O. Improvement Bonds of 1998 105,076 512,829 407,753 Totals $214,783 $560,144 $345,361 Refunding Bonds of 2002 The Water and Sewer Revenue Bonds of 1991/1993/2002 were issued to provide financing for Phase I of the City's Annexation Area Extended (A.A.E.) Trunk facility improvements. The City established special area connection charges to provide for the retirement of these bonds and for financing additional trunk facilities in this area. During 2006, the final debt service payments were made on these bonds. At December 31, 2006 a fund balance of $47,315 remained, all of which was undesignated. We recommend the City transfer out these funds and close the fund in 2007. City of Oak Park Heig Minnes Audit Management Letter Debt Service Funds G.O. Improvement Bonds of 1998 This bond was issued in 1998 to provide financing for Kern Center and Phase Three of the 58 Street improvement. This bond is scheduled to be repaid by special assessments and connection charges. A projection of cash flow of the Improvement Bonds of 1998 is as follows: City of Oak Park Heights, Minnesota Projection of Cashflow ` General Obligation Improvement Bonds of 1998 Total Cash Balance Property Special Other Investment Projected Debt Other Cash Balance Year January I Taxes Assessments Receipts Interest Receipts Payments Disbursements December 31 2007 $496,113 $ $30,913 $50,000 $14,551 $95,464 $162,687 $ $428,890 2006 428,890 29,660 50,000 12,577 92,237 157,500 363,627 2007 363,627 28,407 50,000 10,662 89,069 152,250 - 300,446 2008 300,446 27,153 50,000 8,810 85,963 146,938 239,471 2009 239,471 25,900 45,000 7,013 77,913 141,562 175,823 2010 175,823 24,647 50,000 5,161 79,808 136,125 119,506 2011 119,506 23,394 30,000 3,467 56,861 130,625 - 45,741 2012 45,741 22,141 - 1,538 23,679 - 69,420 ` Total $0 $212,215 $325,000 $63,779 $600,994 $1,027,687 $0 Assumptions Special assessment collection rate .................... 95% Property tax collection rate . ............................... 99% Investment interest rate ..... ............................... 3.00% .� Negative interest charged to funds ? .................. no As shown above, this Debt Service Fund will require connection charge revenue to finance the debt service. City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds CAPITAL PROJECT FUNDS The fund balance (deficits) of the Capital Project Funds were as follows at December 31, 2005 and 2006: December 31, Increase Fund 2005 2006 (Decrease) Capital Revolving $458,382 $723,527 $265,145 ' Budgeted Projects and Equipment Revolving 733,219 1,033,981 300,762 Park Development 358,719 769,057 410,338 Street Reconstruction 510,826 688,138 177,312 Renewal and Replacement 2,645,595 2,928,984 283,389 Brekke Park Memorial 237 350 113 Water Tower Rental 31,942 57,573 25,631 , McKean Square - _ - Oakgreen Avenue Utilities Novak Avenue Street and Utility Improvements - - _ Sanitary Sewer Connection 396,939 476,280 79,341 Water Connection 241,754 667,284 425,530 Storm Sewer Connection 730,295 882,414 152,119 Totals $6,107,908 $8,227,588 $2,119,680 ` i r City of . Park Heights, Minnesota Audit Management Letter Capital Project Funds Capital Revolving Fund During 1984, the City established the Capital Revolving Fund (formerly Closed Bond Fund). Initial financing for this fund was provided through the residual balances of closed (or defeased) special assessment Debt Service Funds of the City. A summary of transactions for 2005 and 2006 is as follows: r Capital Revolving Fund Description 2005 2006 Financial resources: Special assessments $44,342 $7,552 Earnings on investments 13,359 25,946 Sale of land easements - 244,099 ._ Transfers from General Fund 52,740 - Total financial resources 110,441 277,597 Financial uses: Materials and supplies 35 - Contractual services 15,020 12,452 Lighting and pathway project 2,084 - Total financial uses 17,139 12,452 Increase (decrease) in fund balance 93,302 265,145 Fund balance - January 1 365,080 458,382 Fund balance - December 31 $458,382 $723,527 . i • City of Oak Park Heig Minnes Audit Management Letter Capital Project Funds Budgeted Proiects and Equiament Revolving Fund The Budgeted Projects and Equipment Revolving Fund (formerly Capital Improvements r Fund) was established in 1978 to account for monies set aside for various capital improvements. This fund is budgeted annually by the City Council in conjunction with the City's budget process. As part of such process, the City allocates the monies in this fund to specific projects and/or programs. Such allocation/designations were as follows at December 31, 2006: Balance Balance Purpose 12/31/05 Revenues Expenditures 12/31/06 Sealcoat/crack seal $151,351 $30,000 $94,827 $86,524 Outdoor storage 35,000 - - 35,000 Municipal building 20,000 146,250 - 166,250 Recreation: Park building 100,000 125,000 - 225,000 Other 110,074 11,825 34,869 87,030 Computers 81,118 32,500 93,563 20,055 Vehicles: Police 24,041 25,000 24,727 24,314 Public works 43,279 15,900 - 59,179 Furniture and equipment: Community and development 365 - - 365 Building inspections 500 - 422 78 Police 1,625 700 770 1,555 Streets 200 - - 200 Trees 52,706 73,827 2,199 124,334 -� Parks machinery and equipment - 7,000 7,000 - Police radio equipment 29,000 14,500 - 43,500 Police computer equipment - 20,000 - 20,000 Comprehensive plan 28,750 28,750 - 57,500 .� Coalition of utility cities 16,000 - - 16,000 Civil defense 5,000 5,000 - 10,000 Unallocated 34,210 36,017 13,130 57,097 Totals $733,219 $572,269 $271,507 $1,033,981 City of Oak Park Heights, Minnesota Audit Management Letter .r Capital Project Funds Park Development This fund was established by Resolution 88 -12 -33 to account for the development of the City's parks and recreational areas. The fund balance was $769,057 at December 31, 2006, as follows: Prior Years 2006 Total Financing sources: Park fees $365,352 $1,004,240 $1,369,592 Earnings on investments 172,473 34,134 206,607 Donations and contributions 4,937 - 4,937 Total financing sources $542,762 $1,038,374 1,581,136 Financing uses: Professional services $28,533 $1,228 29,761 Park signs 15,902 - 15,902 Valley View Park bridge 65,616 - 65,616 Trail paving 29,794 - 29,794 Playground equipmentibenches 44,198 - 44,198 Autumn Hills park shelter - 347,828 347,828 Linear park land - 278,980 278,980 Total financing uses $184,043 $628,036 812,079 Fund balance - December 31, 2006 $769,057 City of Oak Park Heights, Minnesota " Audit Management Letter Capital Project Funds Renewal and Replacement This fund was established in 1994 for the purpose of creating a reserve balance for partial r financing of future costs to renew and /or replace existing utility systems. This partial financing will be required as these systems are replaced because it is anticipated the City will be unable to assess 100% of such replacements. Initial funding was provided by a transfer of $574,378 from the Water and Sewer Utility Fund. This transfer represented depreciation charges accumulated since 1969. Annually thereafter, additional transfers equal to depreciation on contributed assets are to be _ transferred. A summary of the financial activity from inception is as follows: Prior Years 2006 Total Financial sources: Transfer from water and sewer utility: Initial (1994) $574,378 $ - $574,378 J' Annual 1,461,166 165,517 1,626,683 Earnings on investments 760,622 117,872 878,494 Total financial sources $2,796,166 $283,389 3,079,555 Financial uses: Well No. 1 maintenance $43,266 $ - 43,266 Flouride system 1,581 - 1,581 Lift station repair 29,142 - 29,142 Other 599 - 599 r Transfer out: Deep Well #3 60,129 - 60,129 Street reconstruction 15,854 - 15,854 Total financial uses $150,571 $0 150,571 Fund balance - December 31, 2006 $2,928,984 r City of Oak Park Heights, .r Minnesota Audit Management Letter Capital Project Funds Sanitary Sewer Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: r Prior Years 2006 Total Revenue: Special assessments $44,295 $8,618 $52,913 Earnings on investments 147,164 21,099 168,263 Connection charges: River Hills 1 stand 2nd 39,725 - 39,725 Highway 36 10,551 - 10,551 Wal -Mart 38,751 19,029 57,780 ISD #834 201,373 - 201,373 Brackey 53,311 - 53,311 Brackey West - Oak Park Pond 45,461 - 45,461 Brackey West - Outlots A & B 16,161 - 16,161 Autumn Ridge l st, 2nd and 3rd 65,547 - 65,547 Haase addition 3,186 - 3,186 Valley Senior Service Alliance 224,352 - 224,352 Kern Center 68,474 4,675 73,149 Horn 4 Me Corp. 2,293 - 2,293 Commercial Partners (Kohls) 64,155 - 64,155 Oak Park Commons/Lowes - 66,312 66,312 _. Pine Grove Gardens - 11,321 11,321 Oakgreen Village - 40,014 40,014 Other 21,379 - 21,379 Total revenue $1,046,178 $171,068 1,217,246 Expenditures: Transfer to debt service $386,575 $27,775 414,350 ` Kern Center 20,200 - 20,200 School District improvements 160,000 - 160,000 River Hills I st 30,942 - 30,942 r- 60th Street sanitary sewer 51,522 - 51,522 Oakgreen avenue utilities - 63,952 63,952 Total expenditures $649,239 $91,727 740,966 Fund balance - December 31, 2006 $476,280 City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds Water Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: Prior Years 2006 Total _ Revenue: Special assessments $77,018 $15,001 $92,019 Earnings on investments 141,682 19,784 161,466 Connection charges: ` River Hills 1st and 2nd 64,798 - 64,798 Highway 36 18,352 - 18,352 Wal -Mart 67,088 33,106 100,194 ISD #834 405,341 - 405,341 Brackey 162,444 - 162,444 Brackey West - Oak Park Pond 96,509 - 96,509 Brackey West - Outlots A & B 10,506 - 10,506 Autumn Ridge 1st, 2nd and 3rd 103,372 - 103,372 Haase addition 5,542 - 5,542 Valley Senior Service Alliance 360,203 - 360,203 Kern Center 119,173 24,295 143,468 Hom 4 Me Corp. 3,990 - 3,990 An Commercial Partners (Kohls) 111,625 - 111,625 Oak Park Commons/Lowes - 115,363 115,363 Pine Grove Gardens - 19,694 19,694 Oakgreen Village - 207,912 207,912 ,. Other 37,175 - 37,175 Total revenue $1,784,818 $435,155 2,219,973 Expenditures: Transfer to debt service $1,333,125 $9,625 1,342,750 School District improvements 145,000 - 145,000 River Hills 1 st 29,739 - 29,739 Kern Center 35,200 - 35,200 Total expenditures $1,543,064 $9,625 1,552,689 •- Fund balance - December 31, 2006 $667,284 V City of Oak Park Heig Minnes Audit Management Letter ,.. Capital Project Funds Storm Sewer Connection Charge Fund A summary of the financial activity of this fund from inception is as follows: Prior Years 2006 Total Revenue: Special assessments $97,553 $18,986 $116,539 Earnings on investments 231,475 38,412 269,887 Connection charges: River Hills 1 st and 2nd 50,411 - 50,411 Highway 36 23,253 - 23,253 Wal-Mart 68,511 76,745 145,256 -� ISD #834 289,348 - 289,348 Brackey 117,511 - 117,511 Brackey West - Oak Park Pond 122,262 - 122,262 Brackey West - Outlots A & B 13,310 - 13,310 Autumn Ridge 1 st, 2nd and 3rd 124,046 - 124,046 Haase addition 7,021 - 7,021 Valley Senior Service Alliance 491,883 - 491,883 -- Kern Center 150,896 3,798 154,694 Hom 4 Me Corp. 5,057 - 5,057 Commercial Partners (Kohls) 191,470 - 191,470 Oak Park Commons /Lower - 171,107 171,107 Pine Grove Gardens - 24,935 24,935 Oakgreen Village - (38,165) (38,165) Other 89,108 - 89,108 Total revenue $2,073,115 $295,818 2,368,933 Expenditures: Transfer to Revolving Capital Fund $270,000 $ - 270,000 Transfer to Debt Service Fund 100,800 17,600 118,400 Long Lake storm sewer 27,820 - 27,820 Kern Center 44,600 - 44,600 Kern Center pond expansion 311,302 3,222 314,524 Wal -Mart 41,232 - 41,232 Storm drainage report 9,910 - 9,910 River Hills 1 st 13,757 - 13,757 Valley Point 2nd 17,211 - 17,211 School district improvement 289,348 - 289,348 Brackey addition 99,340 - 99,340 AUAR fees 117,500 122,877 240,377 Total expenditures $1,342,820 $143,699 1,486,519 Fund balance - December 31, 2006 $882,414 q City of • Hei g hts, . Minnes Audit Management Letter Capital Project Funds �a r 0 r • i City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds This fund is committed for future debt service payments on the Bonds of 1998. Such future commitments (cash transfer) are as follows: Future Transfers to 1998 Bond Debt Service Fund Sanitary Water Storm Year Sewer Works Sewer Total 2007 $25,250 $8,750 $16,000 $50,000 2008 25,250 8,750 16,000 50,000 .._ 2009 25,250 8,750 16,000 50,000 2010 25,250 8,750 16,000 50,000 2011 22,725 7,875 14,400 45,000 2012 25,250 8,750 16,000 50,000 2013 15,150 5,250 9,600 30,000 Total $164,125 $56,875 $104,000 $325,000 Based on City estimates, the Connection Charge Funds are scheduled to receive the following future connection charges as development occurs: Estimated Future Connection Charges Sanitary Water Storm Sewer Works Water Total Kern Center $67,301 $349,750 $54,560 $471,611 Total $67,301 $349,750 $54,560 $471,611 City of Oak Park Heights, Minnesota Audit Management Letter Capital Project Funds An analysis of the commitments of the connection charge funds is as follows: Sanitary Water Storm Sewer Works Water Total Fund balance - December 31, 2006 $476,280 $667,284 $882,414 $2,025,978 Future connection charges (est.) 67,301 349,750 54,560 471,611 Subtotal 543,581 1,017,034 936,974 2,497,589 Debt service commitments: Bonds of 1998 (164,125) (56,875) (104,000) (325,000) -- Subtotal 379,456 960,159 832,974 2,172,589 Available for new well - (960,159) - (960,159) Uncommitted $379,456 $0 $832,974 $1,212,430 City of Oak Park Heig Minnes Audit Management Letter .� Enterprise Funds ENTERPRISE FUNDS The enterprise fund accounts for four operations - water, sanitary sewer, storm sewer and sanitation. Presented below is history of change in net assets by activity. Change in Net Assets by Year Sanitary Storm Year Water Sewer Sanitation Sewer Total 2006 $28,623 $37,503 $38,458 $10,742 $115,326 2005 226,051 326,221 20,804 39,279 612,355 2004 13,895 12,665 18,151 26,496 71,207 2003 117,821 87,935 5,457 36,789 248,002 2002 41,573 81,542 3,955 5,794 132,864 2001 41,643 (5,994) (3,604) 5,875 37,920 2000 65,051 (80,152) (255) (4,765) (20,121) 1999 49,552 (111,811) (32,625) 12,279 (82,605) 1998 (31,669) (38,145) (25,637) - (95,451) 1997 11,294 50,550 - - 61,844 1996 26,964 (6,551) - - 20,413 _ 1995 54,581 (2,359) - - 52,222 1994 (302,719) (198,539) - - (501,258) 1993 73,349 40,156 - - 113,505 pre -1993 595,125 595,126 - - 1,190,251 Subtotal 1,011,134 788,147 24,704 132,489 1,956,474 Contributed capital - 1/1/06 2,725,978 2,526,293 - - 5,252,271 Net assets - 12/31/06 $3,737,112 $3,314,440 $24,704 $132,489 $7,208,745 City of Oak Park Heig Minnes Audit Management Letter Enterprise Funds Water Utility Fund A chart of income from operations is as follows: i $600,000 Water Operating Revenue & ^• $500,000 Expense $400.000 - iw rs =Depreciation ® All Other Expenses $300,000 M Contractual Services +� OPersonal Services —f— Operating Revenue $200,000 $100.000 $0 2001 2002 2003 2004 2005 2006 y The City increased water rates effective January 1, 2003 and January 1, 2005. u �r r .-r r City o f . P H rL. Minnes Audit Management Letter Enterprise Funds Sewer Utility Fund A chart of income from operations for the Sewer Utility Fund is as follows: $900,000 Sewer $800 Operating Revenue & $700.000 ✓ - `' Expense v $600.000 / M Depreciation $500,000 ®Personal Services All Other Expenses r $400,000 -- O MCES �_ • -*- Operating Revenue $300.000 aA $200.000 $100,000 $0 2001 2002 2003 2004 2005 2006 w The City revised sewer rates as follows: Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Monthly Rate Effective Effective Effective Effective Effective Effective Effective �.. Type of Charge 04/01/00 01 /01 /01 01/01/02 01/01/03 01/01/04 01/01/05 01/01/06 Water: Base fee $7.50 $7.50 $7.50 $7.50 $7.50 $7.50 $7.50 r Charge per 1,000 gallons for: Usage between 6.000 and 16.000 gallons $1.17 $1.17 $1.17 $1.25 $1.34 $1.34 $1.34 Usage between 17,000 and 33.000 gallons $1.47 $1.47 $1.47 $1.57 $1.68 $1.76 $1.76 Usage in excess of 33,000 gallons $1.76 $1.76 $1.76 $1.88 $2.01 $2.11 $2.11 Sewer: Base fee $12.45 $13.20 $14.00 $14.85 $15.70 $16.65 $16.65 Charge per 1,000 gallons for usage in excess of 5,000 gallons $2.32 $2.46 $2.61 $2.77 $3.00 $3.40 $3.40 City of Oak Park Heights, Minnesota " Audit Management Letter Enterprise Funds Sanitation Utilitv Fund The City began charging for refuse collection in 1988. Prior to 1998, this activity was accounted for in the General Fund. The City moved this activity to the Enterprise Funds during 1998. Refuse collection revenue as a percent of refuse collection expenditures/ expense is as follows: Refuse Transfer Refuse Collection Revenue as a from Net Collection Expenditures/ Net Percent of General Income Year Revenue Expenses Cost Expenditures Fund (Loss) General Fund: 1992 $66,076 $251,121 ($185,045) 26% $ - $ - 1993 103,039 297,452 (194,413) 35% - - 1994 108,310 326,926 (218,616) 33% - - 1995 110,021 334,053 (224,032) 33% - - 1996 103,444 326,036 (222,592) 32% - - 1997 87,830 298,842 (211,012) 29% - - Enterprise Fund: 1998 93,014 309,051 (216,037) 30% 190,400 (25,637) 1999 71,585 169,210 (97,625) 42% 65,000 (32,625) 2000 87,434 175,164 (87,730) 50% 84,000 (3,730) 2001 97,575 184,179 (86,604) 53% 83,000 (3,604) 2002 98,030 182,575 (84,545) 54% 88,500 3,955 2003 97,970 181,013 (83,043) 54% 88,500 5,457 2004 96,909 167,258 (70,349) 58% 88,500 18,151 2005 96,876 164,572 (67,696) 59% 88,500 20,804 2006 97,266 147,565 (50,299) 66% 88,500 38,201 "' r v City o f . P H Minnes Audit Management Letter �. Enterprise Funds Storm Sewer Utility Fund The City created the stormwater utility during 1999. A monthly fee (effective October 1, 1999) was established at $1 per household and $10 per acre for commercial properties. The fee for vacant residential property is 50 cents per month and undeveloped commercial property is $1.50 an acre per month. A chart of income from operation is as follows: r. $80.000 Storm Sewer T Operating $70,000 Revenue & v xpense $60.000 $50,000 M All Other Expenses $40,000 OContractual Services EM Personal Services ` t Operating Revenue $30.000 $20,000 $10,000 u $0 2001 2002 2003 2004 2005 2006 J I , �r City of Oak Park Heights, Minnesota Audit Management Letter Internal Control INTERNAL CONTROL A separate internal control report has been issued in conjunction with the audit. The report cited three significant deficiencies. We noted other matters relating to internal control as ` follows: Delinquent Utilitv Accounts The City currently sends shut -off notices and certifies delinquent utilities to the County Auditor under general guidelines and pursuant to City ordinances, but specific criteria have not been established to indicate when these items are to be done. We recommend the City adopt a *' policy specifically stating the events that indicate when a shut -off notice should be sent, including both the dollar amounts outstanding and the length of time the customer's bill has been outstanding. We also recommend similar guidelines be formalized for certifying the delinquent utility bills to the County Auditor and actually shutting off service to the customer. Establishing and following such a policy could reduce the City's losses due to uncollected utility payments, reduce the potential to grant exceptions or favors to customers who are delinquent, and help City staff to enforce such policies when dealing with delinquent customers. r J y City of Oak Park Heights, Minnesota Audit Management Letter Required Communications REQUIRED COMMUNICATIONS Our Resvonsibility under U.S. Generallv Accepted Auditing Standards and OMB Circular A -133 As stated in our engagement letter dated July 28, 2006, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting principles. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. As part of our audit, we considered the internal control of the City of Oak Park Heights, Minnesota. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. Significant Accounting Policies Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Oak Park Heights, Minnesota are described in Note 1 to the financial statements. For 2006, the City of Oak Park Heights, Minnesota adopted GASB No. 44, which revised the statistical section. We noted no transactions entered into by the City of Oak Park Heights, Minnesota during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. m, City of Oak Park Heights, Minnesota Audit Management Letter Required Communications Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimate affecting the financial statements was management's estimate on depreciation expense. We evaluated the key factors and assumptions used to develop depreciation expense in determining that it is reasonable in relation to the financial ... statements taken as a whole. 4 Audit Adiustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City of Oak Park Heights, Minnesota's financial reporting process (that is, cause future financial statements to be materially misstated). For 2006, there were two audit adjustments proposed by us that were posted by the City of Oak Park Heights, Minnesota. In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City of Oak Park Heights, Minnesota, either individually or in the aggregate, indicate matters that could have a significant effect on the City of Oak Park Heights, Minnesota's financial reporting process. City of Oak Park Heights, Minnesota Audit Management Letter Required Communications Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the government unit's financial r statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Issues Discussed Prior to Retention of Independent Auditors We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City of Oak Park Heights, Minnesota's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing our audit.