City of Otsego - 2015 Communications LetterCity of Otsego
Wright County, Minnesota
Communications Letter
December 31, 2015
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City of Otsego
Table of Contents
Report on Matters Identified as a Result of
the Audit of the Financial Statements
Significant Deficiency
Required Communication
4
Financial Analysis 7
[: berganKDV
BerganKDV, Ltd.
Report on Matters Identified as a Result of
the Audit of the Financial Statements
Cedar Falls
602 Main Street
Suite 100
P.O. Box 489
Cedar Falls, IA
Honorable Mayor, Members of the
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City Council and Management
F 319.268.1720
City of Otsego
Cedar Rapids
Otsego, Minnesota
27201st Avenue NE
Suite 300
P.O. Box 10200
Cedar Rapids, IA
5Z402-0200
In planning and performing our audit of the financial statements of the City of Otsego,
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Minnesota, as of and for the year ended December 31, 2015, in accordance with auditing
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standards generally accepted in the United States of America, we considered the City's
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internal control over financial reporting (internal control) as a basis for designing auditing
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procedures that are appropriate in the circumstances for the purpose of expressing our
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opinion on the financial statements but not for the 1P of expressing an opinion on the
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effectiveness of the City's internal control. Accordingly, we do not express an opinion on
the effectiveness of the City's internal control.
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9207 Northpark Drive
Johnston, IA
50131-2933
Our consideration of internal control was for the limited purpose described in the preceding
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paragraph and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies and, therefore, material weaknesses or
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3800 American Blvd W
significant deficiencies may exist that were not identified.
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A deficiency in internal control exists when the design or operation of a control does not
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allow management or employees, in the normal course of performing their assigned
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functions, to revent, or detect and correct, misstatements on a timel basis. A material
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weakness is a deficiency, or a combination of deficiencies in internal control, such that there
St. Cloud, MN
is a reasonable possibility that a material misstatement of the City's financial statements will
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not be prevented or detected and corrected on a timely basis. We did not identify any
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deficiencies in internal control that we consider to be material weaknesses.
Waterloo
100 East Park Avenue
Suite 300
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
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Waterloo, IA
that is less severe than a material weakness et important enough to merit attention b those
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charged with governance. The significant deficiency identified is stated within this letter.
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The accompanying memorandum also includes financial analysis provided as a basis for
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discussion. The matters discussed herein were considered by us during our audit and they do
not modify the opinion expressed in our Independent Auditor's Report dated June 1, 2016,
on such statements.
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This communication is intended solely for the information and use of management, the City
Council, others within the City and state oversight agencies and is not intended to be and
should not be used by anyone other than these specified parties.
St. Cloud, Minnesota
June 1, 2016
2
City of Otsego
Significant Deficiency
LACK OF SEGREGATION OF ACCOUNTING DUTIES
The City had a lack of segregation of accounting duties due to a limited number of office employees.
Adequate segregation of accounting duties is in place when the following four areas of a transaction
have been separated: authorization, custody, recording, and reconciliation. Examples of functions
within the City that demonstrate this lack of segregation of accounting duties include, but are not limited
to, the following:
• Cash Receipts — The Utility Billing Clerk and Finance Assistant have access to initiate and
record receipts. The Utility Billing Clerk is also responsible for depositing cash receipts. The
Finance Assistant is also involved in the reconciliation process and has full access to the general
ledger.
• Utility Billing Process — The Utility Billing Clerk is responsible for handling customer payments,
depositing payments received, and recording adjustments to accounts.
• Payroll — The Finance Assistant is responsible for creating new employees in the payroll system,
entering, and updating approved rates, processing payroll, and completing month end
reconciliations.
• Disbursements — Due to small staff the City allows access to other employees to perform
disbursement related activities in order to fill in for normal roles and responsibilities in the
absences of other staff. In the absence of the Accounts Payable Clerk, the Finance Assistant has
access to record & cut checks, access to blank checks, can enter manual adjustments to the
general ledger and is involved in the reconciliation of cash.
• Financial Reporting and Journal Entry Process — The Finance Director and Finance Assistant
have full access to the general ledger and can make adjustments without review during the
monthly and yearend financial closing process.
Management and the City Council must remain aware of this situation and management should
continually monitor internal control, including changes that occur.
3
City of Otsego
Required Communication
We have audited the financial statements of the City for the year ended December 31, 2015, and have
issued our report thereon dated June 1, 2016. Professional standards require that we provide you with the
following information related to our audit.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN
THE UNITED STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS
As stated in our engagement letter, our responsibility, as described by professional standards, is to
express an opinion about whether the financial statements prepared by management with your oversight
are fairly presented, in all material respects, in conformity with accounting principles generally accepted
in the United States of America. Our audit of the financial statements does not relieve you or
management of your responsibilities.
As part of our audit, we considered the internal control of the City. Such considerations were solely for
the purpose of determining our audit procedures and not to provide any assurance concerning such
internal control.
As part of obtaining reasonable assurance about whether the financial statements are free of material
misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations,
contracts, and grant agreements. However, the objective of our tests was not to provide an opinion on
compliance with such provisions.
Our responsibility for the supplementary information accompanying the financial statements, as
described by professional standards, is to evaluate the presentation of the supplementary information in
relation to the financial statements as a whole and to report on whether the supplementary information is
fairly stated, in all material respects, in relation to the financial statements taken as a whole.
PLANNED SCOPE AND TIMING OF THE AUDIT
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements; therefore, our audit involved judgment about the number of transactions to be
examined and the areas to be tested.
Our audit included obtaining an understanding of the City and its environment, including internal
control, sufficient to assess the risks of material misstatement of the financial statements and to design
the nature, timing, and extent of further audit procedures. Material misstatements may result from
(1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or
governmental regulations that are attributable to the City or to acts by management or employees acting
on behalf of the City.
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City of Otsego
Required Communication
QUALITATIVE ASPECTS OF ACCOUNTING PRACTICES
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 to the financial statements. The City
implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions and GASB
Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date. We
noted no transactions entered into by the City during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the proper period.
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 estimates affecting the financial statements were:
Depreciation — The City is currently depreciating its capital assets over their estimated useful lives,
as determined by management, using the straight-line method.
Expense Allocation — The City is currently allocating certain costs among the programs and
supporting services benefited. The costs are allocated based on management's estimates.
Net Pension Liability, Deferred Outflows of Resources Related to Pensions, and Deferred Inflows of
Resources Related to Pensions — These balances are based on allocation by the pension plans using
estimates based on contributions.
The financial statement disclosures are neutral, consistent, and clear.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing
our audit.
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all misstatements identified during the audit, other than
those that are clearly trivial, and communicate them to the appropriate level of management.
Management did not identify, and we did not notify them of any, uncorrected financial statement
misstatements.
DISAGREEMENTS WITH MANAGEMENT
For purposes of this letter, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction 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.
City of Otsego
Required Communication
MANAGEMENT REPRESENTATIONS
We requested certain representations from management that are included in the management
representation letter.
MANAGEMENT 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 City's financial 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.
OTHER AUDIT FINDINGS OR ISSUES
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's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
OTHER MATTERS
With respect to the supplementary information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplementary information to the underlying accounting records used to prepare the
financial statements or to the financial statements themselves.
0
City of Otsego
Financial Analysis
The following pages provide graphic representation of select data pertaining to the financial position and
operations of the City for the past five years. Our analysis of each graph is presented to provide a basis
for discussion of past performance and how implementing certain changes may enhance future
performance. We suggest you view each graph and document if our analysis is consistent with yours. A
subsequent discussion of this information should be useful for planning purposes.
GENERAL FUND
The following graph summarizes the past five years of General Fund revenues, expenditures, and fund
balance. For the year ended December 31, 2015, revenues for the City's General Fund totaled
$5,089,342. This represents a decrease of $217,950, or 4.1%, from 2014. General Fund expenditures
totaled $4,424,819 in 2015, which is an increase of $259,633, or 6.2%, from 2014. Revenue and
expenditure activity, combined with other financing sources resulted in a decrease in fund balance of
$503,115 in 2015.
The ending General Fund balance of $2,890,523 is further broken down into spending categories;
$105,547 of the fund balance has already been spent on prepaid items while $128,646 is assigned for
insurance funding. This leaves $2,656,330 available for spending on any purpose, which is considered
unassigned fund balance. The City's policy is to maintain a minimum fund balance in the General Fund
of 45.0% of the subsequent years' expenditures. The fund balance at December 31, 2015, represents
64.9% of 2016 budgeted expenditures of $4,450,667.
General Fund
a V,VVV,VVV
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$
2011
2012
2013
2014
2015
$5,089,342
■Total Revenues
$4,006,449
$3,697,348
$3,779,808
$5,307,292
■ Total Expenditures
2,992,102
3,521,355
3,654,491
4,165,186
4,424,819
■Fund Balance
1,703,598
1,764,591
1,912,075
3,393,638
2,890,523
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City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
Trends for each of the City's major revenue classifications over the past five years are graphically
portrayed in the bar chart below.
As stated earlier, General Fund revenues decreased $217,950, or 4.1%, from 2014. The most significant
decrease was in intergovernmental revenues which decreased $142,416 from 2014 to 2015, due to
recording municipal street aid in a separate capital project fund in 2015. The second most significant
decrease was licenses and permits, which decreased $59,687. This decrease was due to five new
commercial construction permits issued in 2014, which made up approximately 32% of the valuation of
permits issued in the prior year. No such commercial permits were issued in 2015. All other revenue
sources were similar to the prior year.
General Fund Revenues
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$-
—
$(1,000,000)
2011
2012
2013
2014
2015
a Taxes
$3,443,841
$3,245,677
$3,449,691
$3,442,280
$3,444,175
■ Intergovernmental
199,053
208,822
217,630
337,779
195,363
■ Licenses and Permits
23,450
33,915
36,455
1,238,823
1,179,136
•Charges for Services
175,275
59,996
38,321
192,168
174,878
■ Investment Income
119,555
93,509
(5,403)
37,427
15,015
■Other
45,275
55,429
43,114
58,815
80,775
City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
The allocation of revenues by source within each major classification is presented below for 2015 and
2014. The City continues to rely on tax revenue as the majority of its General Fund revenue, accounting
for 67.7% of its total revenue in 2015. Sources of revenue were fairly consistent with the prior year, with
the exception of intergovernmental revenue changing as a result of recording municipal street aid in a
separate capital project fund in 2015.
Taxes
67.
Taxes
64.9%
2015 General Fund Revenues
1.6%
2014 General Fund Revenues
0.7%
ovemmental
3.8 %
and Permits
3.2 %
ovemmental
6.4%
and Permits
3.3%
0
City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
The graph below outlines the budget and actual results for General Fund revenues.
$3,600,000
$3,400,000
$3,200,000
$3,000,000
$2,800,000
$2,600,000
$2,400,000
$2,200,000
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000 .
$1,000,000
$800,000
$600,000
$400,000
$200,000
■ Budget
■ Actual
2015 General Fund Revenues
Budget and Actual
Taxes
Intergovernmental
Licenses and Permits
Charges for Services
Investment Income
Other
$3,439,000
$323,122
$592,000
$50,700
$95,000
1 $1,000
$3,444,175
195,363
t,179,136
174,878
15,015
1 80,775
Overall, actual revenue exceeded budgeted revenue by $588,520, or 13.1%. The largest variance was for
licenses and permits which was $587,136 over budget. This was the result of budgeting conservatively
for commercial construction permits issued in 2015. The second largest variance was in
intergovernmental revenues which were $127,759 under budget due to recording municipal street aid in
a separate capital project fund in 2015. This change was not reflected in the budget. The third largest
variance was in charges for services, which was $124,178 over budget due to higher than anticipated
activity. Investment income was budgeted at $95,000 based on past results while actual investment
earnings and changes in fair market value were only $15,015. Other revenue also includes Special
Assessments, Fines and Forfeitures, and Contributions and Donations.
10
City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
As discussed previously, total General Fund expenditures increased $259,633, or 6.2%, from 2014.
Public safety expenditures increased $170,397, which was across several departments. The increase was
also across all expenditure types (personal services, supplies, and other services and charges) largely due
to the Albertville Fire Contract increasing which is based on the City's tax capacity, as well as a large
increase in building inspections.
General Fund Expenditures
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$
2011
2012
2013
2014
2015
■ General Government
$894,209
$920,619
$973,051
$1,188,802
$1,150,130
■Public Safety
877,875
1,235,982
1,263,881
1,496,112
1,666,509
■Public Works
961,590
998,144
1,109,949
1,014,937
1,034,524
■ Parks and Recreation
246,075
277,605
304,324
461,240
477,445
■ Economic Development
12,353
89,005
3,286
4,095
96,211
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City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
The following charts illustrate the allocation of General Fund expenditures by program/function. The
allocation of total expenditures by program has fluctuated between the past two years as a result of the
changes in expenditures as discussed on the previous page.
2015 General Fund Expenditures
Puhlic Safetv
Economic
Development
2.2%
2014 General Fund Expenditures
Public Safetv
Development
0.1%
Works
.4%
irks
12
City of Otsego
Financial Analysis
GENERAL FUND (CONTINUED)
The graph below outlines the budget and actual results for General Fund expenditures.
2015 General Fund Expeditures
Budget and Actual
$1800 006
,600,000
1400,000
1200,000
1000,000
6800,000
-
6600,000
6400,000
6200,000
General Government
Public Safety
Public Works
Parks and
Recreation
Economic
Development
■Budget
$1,181,723
$1,646,083
$1,067,483
$472,013
$81,350
■Actual
$1,150,130
1,6665509
15034,524
477,445
96,211
Overall, actual expenditures were under budgeted amounts by $23,833, or 0.5%. The public works
program had the largest variance, coming in at $32,959 under budget which is primarily due to fleet
management charges not being as high as expected.
13
City of Otsego
Financial Analysis
ANALYSIS OF TAX LEVY INFORMATION
The chart below graphs the tax capacity, certified tax levy, and City tax rate for 2011 through 2015.
Comparing 2011 through 2015, the City's tax capacity has decreased $301,511, or 2.6%, to
$11,358,615. The City's certified levy increased $713,901, or 18.0%, over the same time frame. As a
result, the City's tax capacity rate has increased from 34.01 % in 2011 to 41.20% in 2015. When
comparing 2014 to 2015 the chart indicates that even with a levy increase of $179,788 the tax rate
decreased from 44.58% to 41.20% due to a $1,262,850 increase in the total tax capacity.
S
9
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
Tax Capacity, Levy, and Rates
0
46.23%
41.45
0 44.58%
"/„ 41.20%
Z
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$11,660,1_
0 0 0 mpg
$11,358,615
M0/
$10,278,548 $10,095,765
$9,470,288
$4,SOQ18g $4,679,976
$4,260,869 $4,378,02i
$3,966,075
2011 2012 2013 2014 2015
fTax Levy —dr-Total Tax Capacity tTax Capacity Rate
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
9
14
WATER FUND
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
City of Otsego
Financial Analysis
Water Fund
$(200,000)
2011
2012
2013
2014
2015
■ Operating Revenues
$728,544
$986,597
$1,195,892
$1,114,528
$1,163,963
■ Operating Expenses
888,876
877,076
907,185
853,551
911,243
■Operating Income (Loss) with Depreciation
(160,332)
109,521
288,707
260,977
252,720
■Operating Income without Depreciation
312,899
582,900
763,931
733,738
726,399
The Water Fund experienced operating income of $252,720 in 2015. This is the fourth consecutive year
with an operating income. We have also illustrated the operating income for the past five years with
depreciation, a non -cash expense, factored out of operating expenses. In 2015, the City experienced
operating income of $726,399 with depreciation expense factored out of operating expenses.
Depreciation expense amortizes the original cost of fund capital assets over their total useful lives.
In 2015, operating revenues increased $49,435, or 4.4%, while operating expenses increased $57,692, or
6.8%. The increase in operating revenues was due to an increase in usage and rates. Operating expenses
increases primarily as a result of increased professional services and supplies.
After factoring in non -operating items and capital contributions, in the form of connection fees, and
transfers the net position in this fund increased by $486,731
15
SEWER FUND
$2,000,000
$1,500,000
$1,000,000
$500,000
$(500,000)
City of Otsego
Financial Analysis
Sewer Fund
$(1,000,000)
2011
2012
2013
2014
2015
■Operating Revenues
$1,051,945
$1,043,570
$1,186,523
$1,325,181
$1,477,603
■Operating Expenses
1,638,686
1,571,150
1,529,321
1,458,714
1,612,830
■Operating Loss with Depreciation
(586,741)
(527,580)
(342,798)
(133,533)
(135,227)
■ Operating Income without Depreciation
239,354
298,662
481,694
689,589
689,210
In 2015, the Sewer Fund continued to generate an operating loss. In 2015, the Sewer Fund experienced
an operating loss of $135,227 with depreciation. Operating revenues increased $152,422 or 11.5% over
the prior year, while operating expenses increased $154,116, or 10.6%. The increase in operating
revenues is due to an increase in both the base rate and the usage rate, as well as an increase in users.
The increase in operating expenses was a result of Biosolids hauling due to being over capacity.
The slight increase in operating loss in 2015 is an indication that this Fund has not effectively
established rates to cover all operating expenses. Without depreciation, operating income totaled
$689,210. We recommend the City continue to monitor operations and fee structures of this Fund to
ensure positive operating results.
After factoring in non -operating items, capital contributions, in the form of connection fees, and
transfers, the net position in this fund increased $629,903.
16
STORM WATER FUND
$110,000
$90,000
$70,000
$50,000
$30,000
$10,000
$(10,000)
$(30,000)
City of Otsego
Financial Analysis
Storm Water Fund
$(50,000)
2011
2012
2013
2014
2015
■ Operating Revenues
$71,762
$37,231
$41,831
$45,570
$45,066
■ Operating Expenses
61,024
69,834
72,944
57,977
95,533
■ Operating Income (Loss)with Depreciation
10,738
(32,603)
(31,113)
(12,407)
(50,467)
■Operating Income (Loss) without Depreciation
28,496
(14,845)
(13,355)
5,376
(29,051)
Operating revenues decreased slightly from the prior year while operating expenses increased, as shown
in the graph above. The Storm Water Fund experienced a small decrease in operating revenues of $504
or 1.1% from 2014. Operating expenses increased $37,556 or 64.8% from 2014 to 2015. The Fund
experienced an operating loss of $50,467 in 2015. Without depreciation included in operating expenses,
the Fund experienced operating loss of $29,051.
After factoring in non -operating items and transfers, this Fund's net position decreased by $2,853. Due
to the overall activity in this Fund, we recommend the City analyze activity to determine if additional
revenues sources are necessary.
17