2002 Management Letter
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CITY OF ALBERTVILLE
Albertville, Minnesota
MANAGEMENT LETTER
December 31,2002
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~DV
KERN. DEWE NTER.VIERE
July 3, 2003
Honorable Mayor and Members of the City Council
City of Albertville
Albertville, Minnesota
The accompanying memorandum includes financial trend information for your City and
suggestions for improvement of accounting procedures and internal accounting control measures
that came to our attention as a result of our audit of the general purpose financial statements of
the City of Albertville, Minnesota, for the year ended December 31, 2002. The matters
discussed herein were considered by us during our audit and they do not modify the opinion
expressed in our independent auditors' report dated July 3,2003, on such statements.
In planning and performing our audit of the general purpose financial statements of the City of
Albertville, Minnesota, for the year ended December 31,2002, we considered the City's internal
control over financial reporting in order to determine our auditing procedures for the purpose of
expressing our opinion on the general purpose financial statements and not to provide assurance
on the internal control over financial reporting. However, we noted certain matters involving the
internal control over financial reporting and its operation that we consider to be reportable
conditions. Reportable conditions involve matters coming to our attention relating to significant
deficiencies in the design or operation of the internal control over financial reporting that, in our
judgment, could adversely affect the City's ability to record, process, summarize and report
financial data consistent with the assertions of management in the general purpose financial
statements.
A material weakness is a condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level the risk that misstatements
in amounts that would be material in relation to the general purpose financial statements being
audited may occur and not be detected within a timely period by employees in the normal course
of performing their assigned functions. Our consideration of the internal control over financial
reporting would not necessarily disclose all matters in internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all reportable conditions that are also
considered to be material weaknesses. However, we believe one of the reportable conditions
described in this letter is a material weakness.
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K-DY
KERN.DEWENTER.VIERE
This report is intended solely for the information and use of the City Council, management and
others within the City and is not intended to be and should not be used by anyone other than
these specified parties.
We would like to express our appreciation for the cooperation extended to us by the
representatives of the City of Albertville during our audit.
Kb\.A-( ~1Ak1C--~, V~, I-f-cl.
KERN, DEWENTER, VIERE, LTD.
8t. Cloud, Minnesota
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FINANCIAL ANALYSIS
General Fund
General Fund revenues increased from $ 1,780,794 in 2001 to $ 2,114,675 in 2002. That
represents an increase of more than 18 percent from 2001. The two largest increases occurred in
general property taxes and licenses and permits. These increased $ 138,322 and $ 280,321 from
2001, respectively. Since 1998 revenues have increased 89 percent or approximately 17 percent
per year.
General Fund expenditures increased from $ 1,378,068 in 2001 to $ 1,943,550 in 2002. That
represents an increase of 41 percent from 2001 to 2002. The largest expenditure increases
occurred in the public safety and parks and recreation departments for capital outlay. Since 1998
expenditures have increased 48 percent or approximately 10 percent per year.
The graphs below and on the following page present the General Fund revenues by source and
expenditures by department since 1998.
General Fund Revenues
$2,250,000
$2,000,000
$1,750,000 . - -
$1,500,000 ~..- - -
$1,250,000 ,~
$33 571
$258,476
$1,000,000
$262,597
$287,302
$500,000
$750,000 - -
$250,000, .
$0 -
1998 1999
2000
-Taxes
II Licenses and Penn its
II Charges for Services
$92198~' - --
$272,892
2001
o Intergovernmental
2002
o Miscellaneous
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FINANCIAL ANALYSIS
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General Fund (Continued)
General Fund Expenditures
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$2,000,000
$800,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000 ~~-
$1,000,000
$600,000
$400,000
$200,000
$0
1998
1999
2000
2001
2002
· General Government
· Park and Recreation
· Public Safety
__-_Sanitation & Econ Dev
o Public Works
[] Miscellan~QllL____ ______
These graphs illustrate that expenditures are more volatile than revenues. Capital expenditures is
one example that demonstrates this; the City may have a capital purchase in one year and not in
another. In 2002 the City expended $ 752,488 out of the General Fund for capital outlay
compared to $ 252,249 in 2001.
The four pie charts on the following two pages show the revenues by source and expenditures by
department for the General Fund for 2002 and 2001.
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FINANCIAL ANALYSIS
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General Fund (Continued)
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Taxes
55%
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2001 General Fund Revenues $ 1,780,794
Taxes
59"10
Licenses and Permits
17%
Interg ov emmental
15%
Miscellaneous
5%
Charges for Services
40/0
2002 General Fund Revenues $ 2,114,675
Licenses and Permits
2 80/0
____ Intergovernmental
10%
Charges for Services
3%
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FINANCIAL ANALYSIS
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General Fund (Continued)
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2001 General Fund Expenditures $1,378,068
Sanitation & Econ Dev
Miscellaneous
2%
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Park and Recreation
2%
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37%
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Publ1c Safety
24%
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2002 General Fund Expenditures $ 1,943,550
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Sanitation & Ecoo Dev
2%
Miscellaneous
1%
Park and Recreation
10%
General Government
30%
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Public Work
14%
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Publ1c Safety
43%
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FINANCIAL ANALYSIS
General Fund (Continued)
Overall, revenues exceeded expenditures by $ 171,125 in 2002. A five-year summary of
revenues, expenditures and fund balance follows. This graph does not reflect transfer activity to
and from other funds occurring during the year. In 2000 and 1998, this impacted the General
Fund balance at year-end as illustrated in the graph. In 2002, the General Fund balance also
increased by $ 497,386 due to the sale ofland.
GENERAL FUND
$2,200,000
$800,000
$2,114,675 i
$1,943,550 I
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$2,000,000
$1,800,000
$1 ,600,000
$1,400,000
$1,200,000
$1,000,000 ---
$600,000
$400,000
$200,000
$0
1998
1999
2000
2001
2002
· Revenues
o Expenditures
. Fund Balance
The 2002 fund balance of $ 1,671,345 is comprised of $ 900,000 designated for operating capital
and $ 771,345 of undesignated amounts. The amount designated for operating capital represents
six months of the 2003 expenditure budget. In order for the City to maintain the six month
designated goal, we recommend the City strive for a ''balanced'' or zero balance in the
undesignated account.
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FINANCIAL ANALYSIS
Sewer Fund
The following graph provides a history of operating income (or loss) for the past five years. The
yellow bar represents a true measurement of operations to be used as a factor in determining
whether sewer rates are sufficient to cover operating costs. As the graph indicates, rates for the
past four years were sufficient to cover operating costs, which includes depreciation of fixed assets.
Revenues that are sufficient to cover operating costs, including depreciation, allow for an
accumulation of cash to help fund replacement of depreciable assets.
SEWER FUND
$300,000
$280.142
$200,000
$180,000
$160,000
$280,000
$260,000
$240,000
$220,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
1998
1999
2000
2001
2002
___~_OjJerati nglncome
II ()peratin~[l1c~rn~~~()~err____
For the past four years rates were sufficient not only in covering all operating costs, but the non-
operating expenses as well. Non-operating costs include interest expense on the PF A loan and
the fund's negative cash balance. The sewer fund generated net income of $ 90,403 in 2002 and
$ 32,333 in 2001; thereby increasing retained earnings, as indicated in the following graph.
Continued positive performance of the sewer fund will improve the fund's cash balance. At
December 31, 2002, the fund had a cash deficit balance of $ 20,112, compared to a negative cash
balance of$ 104,043 at December 31, 2001.
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FINANCIAL ANALYSIS
Sewer Fund (Continued)
Sewer Fund Retained Earnings
$250,000
$200,000 ----
$150,000
$100,000------
$50,000
$0
1998
1999
2000
2001
2002
Market Value, Tax Capacity and Tax Capacity Rates
The three graphs on the following pages provide significant information about the growth
experienced by the City of Albertville to help you continue to analyze your tax rate position.
The first graph depicts market value of all taxable property within the City limits, along with tax
capacity generated by such growth. As evident from the graph, property market value has more
than doubled from $ 90,713,100 in 1998 to $ 225,728,800 in 2002. During the same time tax
capacity has increased from $ 1,345,459 in 1998 to $ 2,624,887 in 2002. When reviewing this
information, it is important to note that during this time frame the tax capacity rate structure did
change.
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FINANCIAL ANALYSIS
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Market Value, Tax Capacity and Tax Capacity Rates (Continued)
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$250,000,000- ..
Tax Capacity and Market Value
$3,000,000
$225,000,000
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$200,000,000
$175,000,000
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$150,000,000
$125,000,000
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$100,000,000
$75,000,000
$50,000,000
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$25,000,000
$0
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1998
1999 2000 2001
[) Market VaJue II Tax Capacity
$2,500,000
$2,000,000
.~
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'-'
"
=
f-
- $1,000,000
, $500,000
2002
The second graph provides insight as to the impact the legislative class rate changes have had on
tax capacity. As you are well aware, the State has changed conversion factors used to convert
market value to tax capacity. As a result, tax capacity rates have had to increase to generate the
same level of levy dollars on a fixed market value.
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Tax Capacity as a Percent of Market Value
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1.5
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1.0
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0.6
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1998
1999
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1.5
2000
2001
2002
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MATERIAL WEAKNESS
Balance Cash to General Ledger
During our audit and review of cash we noted cash did not reconcile to the City's general ledger.
Monthly bank reconciliations were not completed to determine if cash balances to the general
ledger. When cash is not reconciled, the City will not have current reliable cash balance
information for which to gauge expenditure needs.
We recommend the following procedures for balancing cash be implemented:
1. Prepare bank reconciliation by listing the bank balance, deposits in transit, outstanding
checks, and other reconciling items to arrive at the "book" balance.
2. Compare the book balance with the cash balance as shown on the general ledger (Account
XXX-lOlOO & XXX-10400). Cash balances by fund should equal the book balance from
above. Remember to take into consideration the Due To/Due From Other Fund accounts for
expenditures and receipts not going through cash.
3. Any differences should be investigated immediately and cash adjusted accordingly. One
helpful procedure if cash does not reconcile is to prepare a proof of cash. A proof of cash is
prepared as follows:
· List total deposits and other credits as shown on the bank statement. Add deposits in
transit for the current month and subtract deposits in transit from the prior month. This
should equal total receipts for the month per the receipt ledger.
· List total checks and other debits as shown on the bank statement. Add outstanding
checks for the current month and subtract outstanding checks from the prior month. This
should equal total disbursements for the month per the disbursement ledger.
Once cash is balanced to the bank and reconciled with the general ledger, we further recommend
the cash balances by fund be included with the monthly report to the City Council.
REPORTABLE CONDITIONS
Lack of Segregation of Accounting Duties
During our audit, we noted a condition that is considered to be a "reportable condition" as
defined by standards established by the American Institute of Certified Public Accountants.
During the year ended December 31, 2002, the City had a lack of segregation of accounting duties
due to a limited number of office employees. Although this meets the definition of a "reportable
condition," it may not be practical to correct since the costs of obtaining desirable segregation of
accounting duties may exceed benefits that could be derived.
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REPORTABLE CONDITIONS
City Does Not Maintain Historical Cost Fixed Asset Records
The City does not maintain historical cost fixed asset records that provide complete accounting
control over the quantities and costs of its general fixed assets. As a result, we issued a qualified
opinion on the City's general purpose financial statements. At this time, the costs of
implementing such a system may exceed potential benefits that could be derived. Administration
will continually monitor the situation and implement changes, if necessary.
Capital Proiect Fund Accountill!!:
At December 31, 2002 the City operated thirty-nine (39) capital projects funds. Of the funds
being maintained thirty-four (34) funds were in a deficit fund balance position at December 31,
2002. The combined fund balance of all capital project funds was a negative $ 3,523,403 at
December 31,2002. Twenty of the funds did not have any capital expenditures in 2002.
Before the City engages in a new project and establishes a capital project fund, the City should
establish a plan to finance the costs of the project. Capital project funds should be utilized to
account for significant capital acquisition and construction projects. Routine purchases or
maintenance expenditures should be accounted for within the General or Enterprise fund as
appropriate.
We recommend the City examine each of its capital project funds, determine which projects are
complete, and determine what resources to draw on to fund the deficit fund balances. I n the
future the City should only engage in a new project and establish a capital project fund once a
plan is in place to finance the project.
Late Reportinl! of Financial Data to the State
For the years ended December 31, 2002 and December 31, 2001 the City has failed to timely file
financial data to the Office of the State Auditor by the statutory deadline of June 30. The delay
in filing is directly related to the lack of timely completions of cash reconciliations.
We recommend the City Council establish policies and procedures that will ensure that financial
data in the future will be filed with the Office of the State Auditor within a timely manner.
MANAGEMENT SUGGESTION
In our judgment the following comment is a matter which is not a reportable condition as defined
by standards established by the American Institute of Certified Public Accountants; however, we
feel this observation and suggestion regarding activities beyond internal control will benefit
management.
Stal!es to Implement GASB Statement No. 34
The auditing professionals at Kern, DeWenter, Viere, Ltd. have developed a plan that will help
you implement GASB Statement No. 34 in an effective and efficient manner. We assessed
GASB Statement No. 34 in its entirety and we have developed three Implementation Stages.
Each Stage presents issues we believe the City needs to address in order to prepare for reporting
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MANAGEMENT SUGGESTIONS
Sta2:es to Implement GASH Statement No. 34 (Continued)
in accordance with GASB Statement No. 34. To develop each stage, we assessed each area of
the statement and, based on our knowledge and experience with Minnesota cities, prioritized the
issues. Implementation stages one through three were provided to the City in previous years to
serve as an aid in implementing the new requirements outlined in GASB Statement No. 34.
During our fiscal year 2002 audit, we noticed the City has made limited progress toward the
implementation of GASB Statement No. 34.
Keeping in mind the City of Albertville is required to implement GASB Statement No. 34 for the
fiscal year ending December 31, 2004, we recommend the City review our recommendations on
implementation from prior years and evaluate the City's progress toward reaching these goals.
We are available to help you develop a personalized, specific plan if additional assistance is
needed.
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