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Home My WebLink About9A - 98 Financial Report MEETING DATE: AGENDA #: PREPARED BY: AGENDA ITEM: JUNE 7, 1999 9A RALPH TESCHNER, FINANCE DIRECTOR CONSIDER APPROVAL OF 1998 ANNUAL FINANCIAL REPORT AND MANAGEMENT LETTER DISCUSSION: Councilmembers were distributed a copy of the 1998 Financial Report and Management Letter as prepared by the certified public accountant firm of Abdo, Abdo, Eick and Meyers. The report was given to you directly to afford sufficient time to review the document before the June 7th meeting. The audit was conducted in accordance with generally accepted auditing standards and represents an independent opinion of the financial results and status ofthe City ofprior Lake during the year of 1998. History On September 21, 1998 the City Council approved Resolution 98- 105 which authorized the engagement of the Abdo, Abdo and Eick Company to provide auditing services for the fiscal years of 1998, 1999 and 2000. The cost for their professional services to prepare the 1998 CAFR (comprehensive annual financial report) was approved in an amount of $10,560.00. Current Circumstances Contained within the financial report is a legal compliance audit which was performed to ensure compliance with Minnesota Statutes in the areas of; contracting and bidding, deposits and investments, conflicts of interest, public indebtedness and claims and disbursements. According to the auditor's tests, the City has complied with the applicable legal provisions as they apply to the five main categories stated above. Also noted within their report on internal control is the fact that no matters involving internal control structure and operation were observed to contain material weaknesses as defined by GAS (Government Auditing Standards). The audit has been prepared in accordance with generally accepted accounting principals. The primary results indicated within the 1998 audit are: 1.) Actual revenues of $7,116,245 (including transfers in) compared to budgeted revenues of$6,830,198 or 104% of projection. 16200 Ea~ll!''b\\W''i'(Q'lf.S.E.. Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245 AN EQUAL OPPORTUNITY EMPLOYER ~ ~~M\ wfl ,\' C~'~t f11 S ~;yJ .'~- fY'~~~J' ~v<r ALTERNATIVES: 2.) Operating expenditures were $6,676,814 compared to budgeted expenditures of 6,830,198 or 98% of budget. 3.) Revenues exceeded expenditures in the amount of $439,431. The 1998 year-end General Fund balance increased because of two circumstances. The first was careful expenditure of budgeted funds. The City Manager, Finance Director and City department and division supervisors expect that purchases are made only if needed, and adhere to this practice even if funds are available. The second occurrence is that the City received $89,808 of federal disaster aid and an insurance reimbursement of $156,073 for costs associated with equipment depreciation, damage sustained by buildings that did not warrant immediate repair and a tree loss allowance. Both of these revenue sources could not be anticipated or programmed. The Management Letter is intended to bring to the City Council's attention deficiencies or conditions recommended for improvement within the design or administration of the City's financial operations. A graphic summary of the City's results of operations within the General Fund depicting revenues and expenditures is included. Also, under a section entitled "Fund Balance", the auditors discuss the importance of maintaining an adequate fund balance for cash flow purposes and to establish overall long term financial strength. The following alternatives are available to the City Council: 1. Accept 1998 Annual Financial Report and Management Letter as submitted. 2. Delay action according to specific Council reason. RECOMMENDATION: Staff would recommend approval of the management letter and the financial report for the fiscal year ended December 31, 1998 as submitted. A City Financial Reporting Form, which is basically a condensed excerpt of the official document, is required to be submitted to the Office of the State Auditor by June 30, 1999 along with this report. RECOMMENDED MOTION: REVIEWED BY: H:\AUDIT\AUDAGENDOC Please feel free to contact Staff prior to the meeting if you have any questions. Gerry Eick of the firm Abdo, Abdo, Eick and Meyers will make a brief presentation regarding the report and management letter. Motion to accept the 1998 Annual Financial Report and M'UL"'" lIS East Hickory Street Suite 302 p.o. Box 3166 Mankato, MN 56002-3166 COMMUNICA nON WIlli AUDIT COMMITTEE OR ITS EQUN ALENT Mayor and Council City of Prior Lake Prior Lake, Minnesota Dear Mayor and Council: In planning and perfonning our audit of the general purpose fmancial statements of the City of Prior Lake for the year ended December 3 I, 1998, we considered its inteJ1lal controls in order to detennine our auditing procedures for the pmpose of expressing our opinion on the fmancial statements and not to provide assurance on the intemal control. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of intemal control that, in our judgment, could adversely affect the City's ability to record, process, summarize and report fmancial data consistent with the assertions of management in the fmancial statements. A material weakness is a reportable condition in which the design or operations of one or more of the intemal control elements does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the fmancial statements being audited may occur and not be detected within a timely period by employees in the nonnal course of perfonning their assigned functions. Our consideration of the intemal control would not necessarily disclose all matters in the intemal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defmed above. We noted no matters involving the internal control and its operation that we consider to be a material weakness as defmed above. As we continue to work with your City we will make comments or recommendation that we feel appropriate to make your community better. Our perspective is usually driven by fmancial aspects. Our comments can also relate to operations and useful methodologies working successfully outside your community. It is our way of sharing our experience and knowledge. Our value to your City should extend beyond our audit opinion. If there is anything we can do to help, let us know. 507.625.2727 . Fax 507.388.9139 Page Two Other Matters The following are areas that came to our attention during the audit that we feel should be reviewed: Year 2000 Issue The year 2000 Issue results from a computer's inability to process year-date data accurately beyond the year 1999. Except in recently introduced year 2000 compliant programs, computer programmers consistently have abbreviated dates by eliminating the frrst two digits of the year, with the assu)llption that these two digits would always be 19. Thus January I, 1965 became 01/01/65. Unless corrected, this shortcut is expected to create widespread problems when the clocks strike 12:00:01 a.m. on January 1,2000. On that date, some computer programs may recognize the date as January 1, 1900, and process data inaccurately or stop processing altogether. The Year 2000 Issue is likely to affect computer applications before January 1, 2000, when systems currently attempt to perfonn calculations into the year 2000. Furthennore, some software programs use several dates in the year 1999 to mean something other than the date. Examples of such dates are 10/01/99,09/09/99 and 12/31/99. As systems process infonnation using these dates, they may produce erratic results or stop functioning. The Year 2000 Issue presents another challenge - the algorithm used in some computers for calculating leap years is unable to detect that the year 2000 is a leap year. Therefore, systems that are not year 2000 compliant may not register the additional day and date calculations may be incorrect. Most of the City's fmance hardware should be year 2000 compliant but it is important to review all areas (including software) where date-dependent computer infonnation is needed and correct any deficiencies. The City has implemented verification procedures to test the accuracy of infonnation processed internally. The City also should satisfy itself that vendors,.service providers, bankers, customers and other third-party organizations will not experience problems relating to the Year 2000 Issue that could affect the City operations or cash flow. Page Three Fuud Balance Minnesota municipalities must maintain substantial amounts of fund balance in order to meet their liquidity and working capital needs as an operating entity. A substantial portion of your revenue sources (taxes and intergovernmental revenues) are received in the fifth month of each six-month cycle. As you can see from the following infonnation, there is still a need to continue to maintain fund balance in order to keep pace with the increasing operating budget. Percent General of Fund Fund Balance Budget Fund Balance to ~ December 31 Year Budget Budget 1995 $1,968,019 1996 $5,447,005 36.1% 1996 2,039,480 1997 6,153,718 38.9 1997 1,815,122 \998 6,830, \98 26.6 1998 2,254,553 1999 7,127,582 31.6 The fmancial strength shown by good fund balances can affect many areas. One in particular involves the armual bond rating. This has a direct impact on the cost of borrowing and the cost of projects. As the City continues to grow and demand bigger budgets and more services, the security of a strong fund balance will allow for a continuous flow of services regardless of when revenues are received. The following is an analysis of the General Fund's unreserved fund balances for the past four years compared to the following year's budget. Unreserved fund Balance! Budget Comparison 1,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 36.1% 38.9010 26.60/. 31.60/. 1,000,000 1,000,000 o 1995 1996 1997 1998 .....-Actu.1 Fuad aal.llce _Budgeted Page Four Financial Position and Results of Ooerations General Fund The fmancial statements of the General Fund are presented on pages 22 through 28 of the 1998 Annual Financial Report. All general governmental functions of the City which are not accounted for in separate funds are included in the General Fund. Revenues and transfers for the General Fund for 1998 totaled $7,116,245, an increase of $844, I 04, or 13.47% over 1997. This information is presented in graphic form below. Percent Increase Of (Decrease) Revenue Source 1998 Total 1997 From 1997 Taxes $ 3,690,789 51.9% $ 3,164,046 $ 526,743 Licenses and pennits 453,827 6.4 366,341 87,486 Intergovernmental 1,820,329 25.6 1,622,544 197,785 Charges for services 667,507 9.4 603,373 64,134 Fines and forfeits 95,024 1.3 78,582 16,442 Interest 105,196 1.5 74,134 31,062 Other revenue 83,573 1.1 184,212 (104,548 ) Transfers in 200.000 -M 175.000 25.000 Total Revenues and Transfers $ 7.116.245 100.0% $ 6.268.232 $ 844.104 General Fund Revenues by Source Interest revenue 1.5% Intergovernmental 25.6% Taxes 51.9% Fines and forfeits 1.3% Other revenue 1.1% Transfers in 2.8% Licenses and permits 6.4% Page Five Expenditures and transfers for the General Fund for 1998 totaled $6,676,814. This is an increase of2.84% over the 1997 General Fund expenditures and transfers of $6,492,589. This information is presented in graphic form be/ow. Program Current General government Public safety Public works Culture and recreation Economic development Contingency Total current Capital outlay Transit Transfers to other funds Total Public Works 11.9-10 Economic development 0.8% Culture and recreation 15.40/. 1998 Percent Of Total 1997 $ 1,401,320 2,079,501 794,548 1,030;345 51,921 26.081 5,383,715 137,463 301,171 854.464 $ 6.676.814 21.0% 31.1 11.9 15.4 0.8 -M 80.7 2.1 4.5 ~ 100.0% $ 1,229,790 1,981,812 733,802 946,569 52,455 151.964 5,096,392 160,437 301,171 934.589 $ 6.492.589 General Fund Expenditures by Department Transfers out 12.80/. Contingency 0.4% General government 21.0% Transit 4.501. Capital outlay 2.1% Increase (Decrease) Prom 1997 $ 171,530 97,689 60,746 83,775 (534) 025.883 ) 287,323 (22,974 ) (80.125) $ 184.224 Page Six General Fund Expenditures by Object Other services andeh.rats 22.8% Penonalservlces S5.3% Supplies 6.6% Contin2eneyreserve 0.4% Transfers out 11.8% Capital outlay 2.1% * . * * * * This report is intended solely for the use of management and Council. The comments and recommendations in the report are purely constructive in nature, and should be read in this context. Our audit would not necessarily disclose all weaknesses in the system, because it was based on selected tests of the accounting records and related data. If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your convenience. We wish to thank you for the continued opportunity to be of service, and for the courtesy and cooperation extended to us by your staff. March 19, 1999 Mankato, Minnesota (Y1 a f\ft,_1 ~. \. '-~ ,~ ~\.P I~..~..~ '\J' ABDO, ABDO, EICK & MEYERS, LLP Certified Public Accountants