1. Overview of City Audit Procedures CITYOF
CHANHASSEN
A.. 690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317
(612) 937-1900 • FAX (612) 937-5739
MEMORANDUM
TO: Mayor and City Council
' FROM: Don Ashworth, City Manager
DATE: February 12, 1990
SUBJ: Set Special Meeting Dates:
Pa. Refunding Bonds of 1990
b. Meeting with City Auditors
c. Position Classification Plan
(Note: The following is an excerpt from my February 12, 1990
memorandum. Deloitte' s presentation on March 5, 1990 continues
to be as presented here. )
' b. Meeting with City Auditors: One of the ploys which will be
considered by the legislature to balance the state budgetary
1 woes will be to reduce fund balances of cities. As illo-
gical and unconstitutional as this may sound, the state has
done exactly that to school districts. The means by which it
' is accomplished is to determine the amount of money necessary
to provide basic education to the students within the
district, subtract from that the school district's fund
balance and remit the difference.
' The City of Chanhassen is in the process of closing its 1989
books. The general and supportive subledgers of the City
' must conform to federal/state general governmental accounting
standards. Although we must meet GAAFR standards, there
still remains significant latitude in terms of how accrued
vacation, sick leave and severance are booked.
11 This is an issue that Deloitte, Haskins, Sells is very sen-
sitive to. They would very much appreciate an opportunity to
' generally discuss the prospects of state changes as well as
discussing optional reporting standards. Once policies are
established, staff will proceed in closing the books
' accordingly. Cliff Hoffman would make the presentation.
c. Position Classification Plan: The updated Position
Classification Plan is to be presented to the City Council
each year. Staff completed the revisions to each of the
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1 Mayor and City Council
February 12, 1990
Page 2
position write-ups and goal statements have been prepared by
each of the departments. I waited to couple this item with
1 either the bond sale or meeting with auditors. We may now
have too much for one evening. I do not think so as both of
the first two items should be 30 minutes or less.
Recommendation
It is recommended that a special meeting date of February 22,
1 1990, be set to discuss the three items above. The Council has a
worksession with the Planning Commission on February 21st.
February 19th is an official holiday.
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Purposes on and is slut,ect
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Deloitte &Touche
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Mr. Donald Ashworth February 21, 1990
City Manager
City of Chanhassen
690 Coulter Drive
P.O. Box 147
Chanhassen, MN 55317
Dear Mr. Ashworth:
We recommend that the City of Chanhassen consider establishing internal
service funds. Our recommendation is based upon the consideration
that:
. A significant number of Cities in Minnesota are currently using
internal service funds, including:
. . Bloomington
. . Brooklyn Center
11 Brooklyn Park
Eagan
. . Minnetonka
. . Robbinsdale
. The City of Chanhassen has grown to the size that accrual accounting
for certain assets and liabilities would add stability in an unstable
climate for local government aid from the State of Minnesota
IA. CHARACTERISTICS OF INTERNAL SERVICE FUNDS
Internal service funds are used to account for the financing of
goods or services provided by one department or agency to other
departments or agencies of the governmental unit, or to other
governmental units, on a cost-reimbursement basis. Generally
accepted accounting principles (GAAP) do not require the use of
internal service funds unless legally mandated; however, in recent
years state and local governments have increased the use of this
type of fund.
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,busposes only and is suhi ;`:
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Mr. Donald Ashworth February 21, 1990 Qt =
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Governments choose to use internal service funds for a variety of
reasons, including a desire to:
. account for the total cost of each activity
. provide greater ease in costing and pricing services
. accumulate resources for replacing fixed assets
. combine certain governmental fund-type overhead costs so they can
be redistributed to the benefiting programs
. isolate interfund services so that governmental fund types do not
display revenues and expenditures related to interfund
transactions twice within the same fund type
A wide variety of activities are included by governments within the
internal service fund classification in practice. Services
accounted for in internal service funds usually are tangible, and
the extent to which they benefit individual departments of the
government should be possible to determine.
B. POTENTIAL USES OF INTERNAL SERVICE FUNDS
Nationally, some of the more common activities that local
governmental units often account for in internal service funds
include:
. risk management activities, including:
. liability and property insurance
. . health insurance
. . group insurance
' . . workers' compensation
. duplicating and printing services
. purchasing
. central garages and motor pools
. central stores
. communications
. non-salary employee benefits, such as vacation expenditures
. data processing services
Other activities sometimes found in internal service funds include:
. engineering services
. personnel services
. microfilm activities
.I This copy is a preliminary
draft intended for discussion
' purposes only and is sub;cct
to change
Mr. Donald Ashworth February 21, 1990 Deloitte & Touche 3
C. ACCOUNTING AND FINANCIAL REPORTING PROCEDURES RELATING TO INTERNAL
SERVICE FUNDS
Individual internal service funds normally should be used to
account for each type of service. Such segregation is essential to
1 accumulate the costs of providing a service and to ensure that the
resources generated by one service are not used improperly for
another. However, administrative services such as communications,
office supplies, legal services, purchasing services, and printing
and duplicating are often included in a single administrative
internal service fund.
Internal service funds use the flow of economic resources
measurement focus and the accrual basis of accounting. Most
sources of revenues for internal service funds are charges for
goods and/or services to other individual funds within the
reporting entity or to other government entities. Revenues are
recognized in the period they are earned - as soon as a service is
performed or a product is provided. Expenses are recognized in the
period they are incurred. For services rendered to the internal
service fund, the expense is reported when the service has been
1 performed and the amount of the liability can be estimated.
Each internal service fund is reported upon with separate financial
statements, similar to other funds. Internal service funds are
classified as proprietary type funds for financial reporting
purposes, and thus would be grouped by themselves in the annual
financial statements.
D. APPLICABILITY OF INTERNAL SERVICE FUNDS TO SELF-INSURANCE
ACTIVITIES
We believe the use of an internal service fund would be an
appropriate fund classification for self-insurance plans. The use
of an internal service fund would centralize the program, making
the analysis for evaluating the plan's operating results and
financial position somewhat easier than using the General Fund or
the fund that incurred the risk. Maintaining a separate internal
service fund for the self-insurance plan activities also shields
the reserves from use for purposes other than insurance.
1 Specifically, an internal service fund could be implemented in the
self-insurance area through performing the following procedures:
1. Estimate annual costs of the program and develop an internal
"premium" charge for each participating City fund/activity.
Charge the participating funds/activities monthly, using the
rates developed at the beginning of the year.
I
This copy is a pre`:mEnarY
draft !r4en.FE3 bite f sc ss�Uil
pur post:,, only and is soD;',:ct
to charge
Mr. Donald Ashworth February 21, 1990 Deloitte & Tcuc ie 4
2. ex Recognize insurance expenses in the internal service fund
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monthly, based on actual losses incurred and expected losses
for incurred but not reported (IBNR) claims.
3. Evaluate the actual costs incurred in comparison to charges to
funds/activities on a periodic basis to determine whether
charges should be updated to more accurately reflect actual
costs incurred. The timeframe for performing the process of
updating charges should be established in a policy upon
commencing the use of the internal service fund.
In November 1989, Statement No. 10 of the Governmental Accounting
' Standards Board (GASB) titled "Accounting and Financial Reporting
for Risk Financing and Related Insurance Issues" was issued. GASB
Statement No. 10 includes the provisions below:
. If a single fund is used for risk management, it must be either
the general fund or an internal service fund
. If an internal service fund is used, conditions for interfund
charges include the following:
j . . Calculate total charge through estimating losses from
contingencies, which would be reported as expenditure/expense
if it is probable that an asset has been impaired or a
liability incurred, and the amount of the loss may be
reasonably estimated
. . Calculate total charge using an actuarial funding method, with
or without a provision for catastrophic losses
. . If a provision for catastrophic losses is included in the
total charge and surplus fund equity builds up, such equity
should be designated for future catastrophic losses
E. FEDERAL COST ALLOCATION REQUIREMENTS
At present, Office of Management and Budget Circular A-87 cost
principles support the use of internal service funds as a means of
administering cost allocation. Federal officials do express
concern in specific cases where large amounts of retained earnings
(fund equity) have accumulated in such funds because this may be an
indicator that the internal service charge rates have been set too
high and/or have not been reviewed and adjusted regularly.
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This copy is a preliminary
draft intended for discussion
Mr. Donald Ashworth February 21, 1990 purposes only and S subject 5
to change
eloitte & Touche
SUMMARY
We believe that internal service funds represent an appropriate means
of accumulating costs for certain common activities and allocating such
costs to user groups through charges for services. Should you desire
any assistance in the implementation of our recommendations, we would
be pleased to do so at your convenience.
' Yours truly,
DELOITTE & TOUCHE
11
Clifford W. Hoffman
11 Partner
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II CITY OF MINNEAPOLIS r4
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COMBINING BALANCE SHEET :i.
ALL INTERNAL SERVICE FUNDS I
I December 31, 1988 Total
ASSETS
Current Assets:
II Cash and Investments $ 1,401,608
Receivables
Accounts - Net 140,713 I Unbilled Accounts 516,167
Due from Other Funds 2,823,284
Advances to Other Funds 1,790,000 ;
Inventories 2,532,505 ,
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I Total Current Assets 9,204,277 i
Fixed Assets:
Land 547,354 ,
Buildings and Structures 5,988,394
II Accumulated Depreciation
Equipment (2, 189,042)
26,699,208
Accumulated Depreciation (16,944,093) i
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II Fixed Assets - Net of Accumulated Depreciation 14,101 ,821
Total Assets $23,306,098
LIABILITIES AND FUND EQUITY y
1 Current Liabilities:
Salaries Payable $ 564,818
Accounts Payable 651 ,833
II Due to Other Funds 182,631
Advances from Other Funds 1,790,000
Deferred Revenue 92,890
ilTotal Current Liabilities 3,282,172
Long-Term Liabilities:
I Compensated Absences Payable 516,858
Capital Lease 834,051
Total Long-Term Liabilities 1,350,909
Fund Equity:
Contributions From General Fund 1,089,367
1 Contributions From General Fixed
Assets Group of Accounts 6,456
Retained Earnings -
II Reserved for Major Repairs and Additions 894,000
Unreserved 16,683,194
Total Fund Equity 18,673,017
ITotal Liabilities and Fund Equity $23,306,098
11 The notes to the financial statements
are an integral part of this statement.
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F-1
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I Paving Permanent Improve- Land and Public Works Intergovernmental
Products went Equipment Buildings Stores Services
1 $ 441,218 $ 23,828 $ 869,189' $ 62,740 $ 4,633
1 ,369 116,604 9,382 3,344 10,014
II 92,890 423,277
34,874 1,582,351 95,989 96,578 1,013,492
I ,790,000
108,152 574,585 1,810,222 39,546
1 2,468,503 2,720,645 974,560 1,972,884 1,067,685
1 547,354
1,644,881 4,333,331 10,182
II (618,335) (1,561,405) (9,302)
358,101 23,792,897 90,350 102,649 2,355,211
(254,916) (15,221,890) (44,606) (40,847) (1,381,834)
II1 , 129,731 11 ,890,287 46,624 61,802 973,377
$3,598,234 $14,610,932 $1 ,021 ,184 $2,034,686 $2,041 ,062
II
1 $ 48,755 $ 328,535 $ 75,432 $ 20,823 $ 91,273
2,216 267,775 56,548 101,375 223,919
16,039 54,449 70,369 15,747 26,027
I 400,000 640,000 750,000
92,890
' 159,900 1 ,050,759 202,349 777,945 1,091,219
42,475 325,180 69,471 6,510 73,222
834,051
42,475 325,180 69,471 6,510 907,273
PI1,089,367
2,986 3,470
894,000
2,498,873 13,234,993 749,364 160,864 39,100
3,395,859 13,234,993 749,364 1 ,250,231 42,570
$3,598,234 $14,610,932 $1,021,184 $2,034,686 $2,041,062
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I INTERNAL SERVICE FUNDS
IInternal Service Funds are used to account for the financing of goods or
services provided by one department or agency of a government to other
departments or agencies on a cost-reimbursement basis.
The Self-Insurance-Dental Fund is used to finance the
County's dental insurance employee benefit, including fees received from
1 other funds and departments, claims paid and administration fees.
The Self-Insurance-Health Fund is used to finance the
I County's medical insurance employee benefit, including fees received from
other funds and departments, claims paid and administration fees.
I The Self-Insurance-Liability Fund is used to finance the
County's liability and auto damage insurance.
The Communications Fund is used to account for the fees
I charged and expenses paid for the telephone system consortium that the
County belongs to along with other local agencies and governments.
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IOLMSTED COUNTY Statement E-1
COMBINING BALANCE SHEET
I ALL INTERNAL SERVICE FUNDS
DECEMBER 31. 1988
WITH COMPARATIVE TOTALS AT DECEMBER 31. 1987
I (Amounts in Dollars)
Totals
. Self-Insurance Self-Insurance Self-Insurance
I - Dental - Health - Liability Communications 1988 1987
ASSETS
' Current Assets:
Cash, deposits and investments 108,406 0 295.919 116,768 521.093 299.448
Receivables
Accounts (net)
I 0 0 0 75.232 75.232
60.918
Prepaid items 0 39,351 0 0 39.357 0
ITotal Current Assets 108.406 39.357 295.919 192.000 635,682 360,366
IFixed assets (net) 0 0 0 1,983 1.983 350
I Total Assets 108,406 39.357 295.919 193,983 637.665 360.716
= ==== =====-========= ======-a-====== _---_---3 --_---__--
ILIABILITIES AND FUND EQUITY
Current Liabilities:
Cash overdraft 0 2.809 0 0 2.809 0
IAccounts payable 0 0 2,382 16.208 18.590 10.263
Salaries payable 0 0 0 1,916 1,916 2,445
Estimated payable for
II outstanding insurance claims 13.000 1.228 254.355 0 268.583 135.190
Deferred revenue 3,663
35.320 0 0 38.983 0
ITotal liabilities 16.663 39.357 256.737 18.124 330.881 147,898
Fund Equity:
IContributed capital 0 0 0 23.157 23.157 23.157
Retained earnings
Unreserved 91.743 0 39.182 152.702 283.627 189,661
Total Fund Equity 91,743 0 39.182 175.859 306.784 212.818
I Total Liabilities
and Fund Equity 108.406 39,357 295.919 193.983 637.665 360.716
============ass =_============_ __=_=========== at _===== == ====== ________
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The notes to the financial statements are an integral part of this statement.
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OLMSTED COUNTY Statement E-2 •
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COMBINING STATEMENT OF REVENUES. EXPENSES, AND CHANGES IN RETAINED EARNINGS
I al INTERNAL SERVICE FUNDS r
FOR THE YEAR ENDED DECEMBER 31. 1988
WITH COMPARATIVE TOTALS FOR THE YEAR ENDED DECEMBER 31. 1987 r
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I (Amounts in Dollars)
Totals
I Self-Insurance Self-Insurance Self-Insurance
- Dental - Health - Liability Communications 1988 1987
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le rating Revenues:
Charges for services
Insurance fees 186.099 1.717.505 149.475 0 2.053.079 306,466 C.
Telephone system fees 0 0 0 483.951 483.951 368.715
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Total Operating Revenues 186.099 1.717.505 149.475 483.951 2.537.030 675.181
perating Expenses:
enses:
Personal services 0 0 0 42.839 42.839 40.100
Consultants and professional
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services 0 0 154.139 30.820 184.959 29.713
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Repairs and maintenance 0 0 5,493 0 5,493 38
Other services and charges 166.488 1.717.505 0 8.291 1,892.284 261,055
ISupplies 0 0 0 36.530 36.530 15.691 _
Utilities 0 0 0 304.561 304,561 231.800
Depreciation 0 0 0 532 532 40
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Total Operating Expenses 166.488 1.717.505 159,632 423.573 2.467.198 578.437
IOperating Income (Loss) 19.611 0 (10.157) 60,378 69.832 • 96.744
I n-Operating Revenues: r
Investment income 5.400 0 13.847 4,887 24,134 9,800
INet Income 25.011 0 3.690 65,265 93.966 106,544 T
Retained Earnings - January 1 66.732 0 35.492 87.437 189,661 83,117
Rained Earnings - December 31 91.743 0 39.182 152.702 283.627 189.661
s ss .sa :essss.....cs sas.....sa ........MMMMMM .....acaasmm
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motes to the financial statements are an integral part of this statement.
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CITY OF RICHFIELD, MINNESOTA
INTERNAL SERVICE FUNDS
COMPREHENSIVE ANNUAL FINANCIAL REPORT
FO THE YEAR ENDED DECEMBER 31, 1988
11 Internal Service Funds are authorized by Section 7.12, Subdivision 6
of the City Charter in that there may be maintained "one or more
working capital or revolving funds, for financing self-sustaining
activities not accounted for through other funds."
The Permanent Improvement Revolving Fund is used to advance to local
improvments funds the cost of improvements for which special
assessments are to be levied and to provide interim financing of
, capital expenditures for project of the City.
The Central Garage and Equipment Fund, the Data Processing_ Fund, the
Central Services Fund, and the Self Insurance Fund are self-
sustaining funds providing service to other departments within the
City and for which tranfers are made by the using department.
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CITY OF RICHFIELD, MINNESOTA IE
INTERNAL SERVICE FUNDS
COMBINING BALANCE SHEET 1t
II December 31, 1988
Permanent Central Garage j
Improvement and
IIRevolving Fund Equipment Fund
ASSETS [-
Current Assets:
I Cash and temporary cash investments $800,094 $1,517,753
Receivables:
Special assessments 62,731 i
I Accounts 655 543
Due from other funds 74,865 234
Due from other governments 6,422
Inventory 18,795
I Work-in-process 12,414
Total Current Assets 950,759 1,543,747
0
II Property and Equipment:
II Building improvements
Office equipment 2,672 li
Machinery and equipment 2,919,914
IIOther improvements
-- 2,5$6
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(Less accumulated depreciation 1,372,620:,
' - Ndt-Property and -Equipment -------1;349;966
Total Assets 950 759 $1093213 p
LIABILITIES AND EQUITY
IICurrent Liabilities:
Accounts payable $ 7,666
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Accrued salaries and employee benefits payable 14,640
I Due to other governments 123
Total Current Liabilities 22,429
' Long-term Liabilities:
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Long-term advance
Equity:
IContributed capital 1,237,391
Retained earnings:
Reserved 300,648
IUnreserved $950,759 1,532,745
Total Equity 950.759 3,071,284 0
ITotal Liabilities and Equity $950,759 X3,093.713
0
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IIFORM K
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Data Central Self Total
I Processing Services Insurance
Fund Fund Fund 1988 1987
II $ 62,565 $42,922 $1,026,063 $3,449,397 $3,036,148
I 439
62,731 82,895
1,637 14,467
990 1,456 77,545 110,059
1,789 1,246 9,457 3,451
II 1,525 13,165 33,485 38,404
12,414 15,680
67,308 58,789 1,026,063 3,646,666 3,301,104
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4,635 4,635 4,635
II 6,990 125 9,787 9,256
707,836 42,004 3,669,754 3,201,329
2,556 1,318 3,874 '3,874
722,017 43,447 3,688,050 3,219,094
II 261,642 34,138 1,668,400 1,386,948
460,375 9,309 2,019,650 1,832,146
52_7 683 68098 $1,026,063 15 666,316 5 133,25.0
II
$ 8,016 $ 2,822 $ 18,504 $ 22,524
II 17,552 5,767 $ 423,546 461,505 601,554
23,855 23,978 456
25,568 8,589 447,401 503,987. 624,534
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160,000 160,000
II12,842 19,477 1,270,210 , 1,139,994
I 300,648 311,975
329,273 40,032 578,662 3,431,471 3,056,747
11 342,115 59,509 578,662 5,002,329 4,508,716
$5,666,316 X5,133,250
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527 683 $6898 )1,026,063
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