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A. Review of 2005 Audit CITY OF CHANHASSEN 7700 Market Boulevard PO Box 147 Chanhassen, MN 55317 Administration Phone 952.2271100 Fax 952.227 1110 Building Inspections Phone 952.2271180 Fax 952.2271190 Engineering Phone 952.227 1160 Fax 952.2271170 Finance Phone 952.2271140 Fax 952.227 1110 Park & Recreation Phone 952.2271120 Fax 952.227 1110 Recreation Center 2310 Coulter Boulevard Phone 952.2271400 Fax 952.227 1404 Planning & Natural Resources Phone 952.2271130 Fax 952.227 1110 Public Works 1591 Park Road Phone 952.2271300 Fax 952.2271310 Senior Center Phone 952.2271125 Fax 952.227 1110 Web Site www.cl.chanhassen.mn.us A - MEMORANDUM TO: Mayor City Council Members FROM: Greg Sticha, Finance Director " (t). t., . oW' DATE: July 6, 2006 SUBJ: ReVIew of 2005 Audit The Finance Department just finished another audit cycle. Melame Accola, the audit manager from lll..B Tautges, Redpath will be here on Monday evening to review the financial results and audit findings of the 2005 audIt. BACKGROUND The statements are once agam presented with information that takes mto account the CIty's entIre financial picture in a format similar to a proprietary or a for-profit orgamzation, including a statement of activitIes which breaks out the primary government and proprietary revenues and expenses by functIOn type. For 2005, the General Fund had an increase in fund balance of $675,519. This was the result of a surplus of revenue over expenditures, which was due to a couple of items. The first was excess Tax Increment from the closing of the Eden Trace and NatIonal Weather Service TIF districts ($236,000), secondly larger than anticipated collection of Engineering Administration Construction Fees ($100,000) and spending less than budgeted expenditures in the fund of about two percent ($179,000). The CIty's enterprise funds had an increase in net assets of over $450,000 in 2005. It should be noted that an operating loss was shown in all three funds on Statement 7~ however, that includes amounts for depreciation and does not include connection charge revenues. By taking into account each of those items, all three funds would have shown profits for 2005. In total, the city's enterpnse funds appear to be financially stable as of the end of the year in 2005 and are m line wIth the current rate study. AUDIT FINDINGS There are three reports that lll..B Tautges, Redpath completes for the City. The first IS the Independent Auditor's Report on Compliance wIth Minnesota Legal The City of Chanhassen . A growing community with clean lakes, quality schools, a charming downtown, thriving businesses, winding trails, and beautiful parks. A great place to live, work, and play. Review of 2005 Audit July 6, 2006 Page 2 of2 Compliance GUIde for Local Government. This report is submitted to the Office of the State Auditor along with the annual report. There were no findings in thIS report for 2005. The second report is the Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting. This report lists conditions that could affect our ability to properly record and report transactions. These conditions do not rise to the level of a material weakness in our controls, but should be corrected to help ensure that procedures are properly followed. There was one Item noted m this report. Payroll timesheets from the fire department did not show evidence of proper supervIsor approval in all instances for those items tested. Our response to the finding was once finance staff was made aware of the problem, a new policy was implemented immediately in February of 2006 to require the proper signatures on all types of fire department timesheets. The third report is the audit management letter. This is a longer descriptIOn of summary information that highlights comparisons and trends for financial results. This also reviews city policies, procedures and systems, and outside factors that may affect the city's financial operations. A few items were recommended in this report and will be discussed at the meeting. This is somethmg that HLB Tautges, Redpath does outside of the scope of audIt requirements. Ms. Accola will explain this information and will be happy to respond to your questions on Monday along with me. ATTACHMENTS 1. Consolidated Annual Financial Report (CAFR) 2. Report on Compliance with Minnesota Legal Compliance Guide 3. Report on Compliance and on Internal Control 4. Audit Management Letter II Tautges Redpath. Ltd. Certified Public Accountants and Consultants REPORT ON COMPLIANCE WITH MINNESOTA LEGAL COMPLIANCE AUDIT GUIDE FOR LOCAL GOVERNMENT To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the City of Chanhassen, Minnesota, as of and for the year ended December 31, 2005 and have issued our report thereon dated May 26, 2006. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the Minnesota Legal Compliance Audit Guide for Local Government promulgated by the State Auditor pursuant to Minnesota Statutes Section 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers seven categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that for the items tested, the City of Chanhassen, Minnesota complIed with the material terms and conditions of applicable legal provIsions. This report is intended solely for the information and use of the City of Chanhassen, Minnesota's City council and management and is not intended to be, and should not be, used by anyone other than these specified parties. I#~ ~ ~~ t,i HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 26, 2006 4810 White Bear Parkway White Bear Lake, Minnesota 55110 1303 South Frontage Road Suite 13 Hastings. Minnesota 55033 651 4267000 651 4265004 Fax www hlbtr com 651 4804990 651 4265004 Fax HlB Taulges Redpath, ltd, is a member of IIIIlnlernalional, a world-wide organization of accounting lirms and business advisors, III Tautges Redpath. Ltd. Certified Public Accountants and Consultants AUDIT MANAGEMENT LETTER To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the City of Chanhassen, Minnesota for the year ended December 31,2005, and have issued our report thereon dated May 26, 2006. Professional standards require that we provide you with the following information related to our audit. REQUIRED COMMUNICATIONS Our Responsibility under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated November 3,2005, 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 internaJ control of the City of Chanhassen, Minnesota. 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 obtaming reasonable assurance about whether the financial statements are free of material misstatements, we performed tests of the City of Chanhassen, Minnesota's compliance with certain provisions of Jaws, regulations, contracts and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. 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 appropnateness of accounting policies and their applicatIon. The significant accounting policies used by the City of Chanhassen, Minnesota are described in Note 1 to the financial statements. For 2005, the City adopted GASB Statement No. 40, related to cash and investments, which revised the footnote disclosure We noted no transactions entered into by the City of 4810 White Bear Parkway White Bear Lake. Minnesota 55110 651 4267000 651 4265004 Fax wwwhlbtr.com 1303 South Frontage Road Suite 13 Hastings. Minnesota 55033 6514804990 6514265004 Fax HLB Tautges Redpath, Ltd. is a member of . International. a world-wide organization of accounting firms and business advisors Audit Management Letter City of Chanhassen, Minnesota Page 2 REQUIRED COMMUNICATIONS Chanhassen, 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. 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 were management's estimate of depreciation and fair value of investments which are based on estimated useful lives and broker statements. We evaluated the key factors and assumptions used to develop the depreciation and fair value of investments in determining that they are reasonable in relation to the financial statements taken as a whole. Audit Adjustments 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 mayor may not indicate matters that could have a significant effect on the City of Chanhassen, Minnesota's financial reporting process (that is, cause future financial statements to be materially mlsstated). We proposed, and management recorded 53 adjusting Journal entries related to the following areas: a) Recording current year interest income, accrued interest receivable, management fee expense, and the allocation of these items to the funds. b) Reallocation of construction expenditures, recording capitalized projects, contract payable and Retainage payable. c) Reconciling adjustments to property tax revenue and receivables. d) Recording bond proceeds, accrued interest payable and bond payment re-allocations. e) Recording transfers and closing funds. f) Correcting entries made to capital assets and depreciation expense. g) Recording outstanding loan payable with the State of Minnesota. h) Adjusting deferred revenue. i) Recording addItional accounts receivable. Audit Management Letter City of Chanhassen, Minnesota Page 3 REQUIRED COMMUNICATIONS In addition, the attached schedule summarizes uncorrected misstatements of the financial statements. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. 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 governmental unit'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. 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 Chanhassen, 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. Audit Management Letter City of Chanhassen, Minnesota Page 4 OTHER MATTERS During our audit for the year ended December 31, 2005, we noted the following other matters: Environment ProtectionIManagement Fund The activity accounted for in this fund does not have a source of funding. For 2005, the funds balance decreased $108,000 to a balance of $139,000 at December 31, 2005. The 2006 budget reflects an additional decrease of $108,000. It is our understanding this activity will be transferred to the Surface Water Management Fund. Based on the previously mentioned figures, this activity should be accounted for in the Surface Water Management Fund beginning in 2007. 1998B Bonds Debt Service Fund During 2005, the 1998B Bonds were paid off. We recommend closing this Debt Service Fund and transfer the remaining assets of $440,486 to the Permanent Revolving Debt Service Fund. 2005A Bonds - Special Deferred Assessments The primary source of repayment for this bond issue is special assessments. However, a substantial portion of the assessments are classified as green acre properties and not under current collection procedures. Management believes collection of these green acre assessments will coincide with debt service requirements. We recommend management continue to monitor the status of this fund. Audit Management Letter City of Chanhassen, Minnesota Page 5 RECENTLY ISSUED ACCOUNTING STANDARDS The Governmental Accounting Standards Boards (GASB) recently approved the following statements which were not implemented for these financial statements: Statement No. 44 Economic Condition Reporting: The Statistical Section - an amendment to NCGA Statement 1. The City's Comprehensive Annual Financial Report (CAFR) includes a statistical section. This section presents multi-year trend information on financial and non- financial data. GASB 44 modifies the information that is required to be presented in a statistical section. The provisions of this Statement are effective for the City's 2006 CAFR. Statement No. 45 Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pension Plans. The components of employee compensation not only include wages, healthcare benefits and pension benefits, but also include other postemployment benefits (OPEB). OPEBs include postemployment healthcare benefits and other postemployment benefits such as life insurance and long-term disability. Under current practice, the common method of accounting for the cost of OPEBs is on a pay-as-you-go basis. With the implementation of GASB No. 45, OPEB costs are recognized on financial statements when they are earned, not when they are paid. The provisions of this statement are effective for the City's 2008 CAFR. Statement No. 46 Net Assets Restricted by Enabling Legislation - an amendment of GASB Statement 34. Implementation requires that limitations on the use of net assets imposed by enabling legislation be reported as restricted net assets. In the process of applying thIS provision, some governments have had difficulty interpreting the requirement that those restrictions be "legally enforceable." The confusion over this phrase has resulted in a diversity of practice that has diminished comparability. This Statement clarifies that a legally enforceable enabling legislation restriction is one that a party external to a government - such as citizens, public interest groups, or the judiciary - can compel a government to honor. The provisions of this Statement are effective for the City's 2006 CAFR. Statement No. 47 Accounting for Termination Benefits. The provisions of thiS Statement are effective for the CIty's 2006 CAFR. Audit Management Letter City of Chanhassen, Minnesota Page 6 Closing This information is intended solely for the use of the City of Chanhassen, Minnesota's City Council and management of and is not intended to be and should not be used by anyone other than these specified parties. ~tS~~ttL HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 26, 2006 1m Tautges Redpath. Ltd. Certified Public Accountants and Consultants REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City of Chanhassen, Minnesota, as of and for the year ended December 31, 2005 which collectively comprise the City of Chanhassen, Minnesota's basic financial statements, and have issued our report thereon, dated May 26, 2006. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performmg our audit, we considered the City of Chanhassen, Minnesota's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide an opinion 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 opt;ration of the internal control over financial reporting that, in our judgment, could adversely affect the City of Chanhassen, Minnesota's ability to record, process, summarize and report financial data consist with the assertions of management in the financial statements. One reportable condition is described in the accompanying schedule of findings as item 2005-1. A material weakness IS a reportable 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 caused by error or fraud in amounts that would be material in relation to the 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 the 4810 White Bear Parkway White Bear Lake. Minnesota 55110 6514267000 6514265004 Fax www.hlbtrcom 1303 South Frontage Road Suite 13 Hastings, Minnesota 55033 651 4804990 651 4265004 Fax HLB laulges Redpalh.li<1. is a membel 01 'I\lllllemalional, a wOIld.wide organizalion 01 accounting lirrns and business advisOls, Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 2 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 that none of the reportable conditions described above is a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Chanhassen, Minnesota's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance WIth which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We also noted certain additional matters that we reported to management of the City of Chanhassen, Minnesota in a separate letter dated May 26, 2006. This report is intended solely for the information and use of the City of Chanhassen, Minnesota's City Council and management and is not intended to be, and should not be, used by anyone other than these specified parties. /It" ~ ~-' (/;I. HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 26, 2006 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 3 2005-1 Payroll Timesheet Approvals Criteria: Internal controls over payroll have been established to ensure that all employees are being paid the proper amount. Condition: The payroll process requires that all timesheets be approved by department heads. During our payroll walkthrough, we observed that timesheets received from the fire department did not have evidence of approval. Cause: Unknown. Effect: Not following appropriate control procedures could prevent detection of intentional or unintentional error related to payroll expenditures. Management Response: Once finance staff was made aware of the need and lack of supervisor signatures on the various timesheets of the paid on-call fire staff, a new policy was immediately implemented in February of 2006 to require those signatures. All timesheets from the paid on-call fire staff for 2006 will include the proper supervisor signatures.