Committee Minutes

Minutes Finance/Development Committee
Tuesday, July 26, 2005 - 3:30 p.m._______

The Finance/Development Standby Committee (Audit Committee) met on Tuesday, July 26, 2005 at 3:30 p.m. in Room A101 in City Hall with the following members present: Committee Chair Christensen; Hamerlik, Gershman.

Also present were John Schmisek, city auditor; Joe Martin and Ron Johnke, Brady Martz Associates, P.C.

2.1 Matter of review of 2004 audit report.
Joe Martin presented short listing of items re. the Comprehensive Report, that they would go through the executive summary and somewhat follow the agenda but a brief summary; that this is the second year that the City has implemented the GASB Statement 34 and went through great detail last year how some of those things reconciled and won't be doing that this year, there are two sets of financial statements. He stated in the financial section of the CAFR, section 2, pages 1 and 2, - financial statements are your financial statements and their job is to express an opinion on the financial statements, and their opinion is unqualified opinion which means that the financial statements are expressed fairly and with generally accepted accounting principles, a clean opinion, best opinion you can have.

He reviewed some of the financial highlights and with new GASB Statement 34 this management discussion and analysis can give you a good summary of everything that is in the report. He suggested looking at pages 3 to 17 to give you a good synopsis of what happened during 2004, and for even a briefer synopsis on page 3 in the financial highlights can see assets of the City, ending fund balances for the governmental funds (general fund, special revenue funds, capital project funds, everything except for enterprises); the general fund, unreserved, undesignated, what you have available and not designated anywhere else, at the end of the year; the City did refinance some debt last year, saving about $112,000 with that refinancing. The rest of the report, Basic Financial Statements is the summarized version of all the funds; next section is the footnotes to the financial statements and in there will find details on the debt issues and fixed assets and accounting policies; next section, combining and individual fund statements, where you can go to some of the individual funds that roll up to the basic financial statements in the front; last section is the statistical section and this is where you can find a lot of good information on demographics, property taxes, debt service coverage, etc. and numbers for the last 10 years.

Christensen asked that they look at the Enterprise Funds, revenue and expenditures. Mr. Martin stated pages 30 and 31, operating revenues and expenses for the various enterprise funds, first section gives you the operating revenues for each of the major funds, sanitation, sewer, storm sewer, waterworks, Alerus and total operating revenues for each of those, and the next section would be the total operating expenses for each of those, and then net income or loss from operations before depreciation. Christensen stated Sewer having a loss of $400,000 before capital contributions, is a real loss - didn't bring in enough revenue to cover the expenses, no deprecia-tion there. Mr. Martin stated Sewer with total operating revenues of $6.9 million and operating expenses of $3.4 and from operations had income of $3.4 million and depreciation of $2.8, so operations-wise $617,000. Christensen stated they account for depreciation but from fund accounting they never account for that, Mr. Martin agreed. Christensen stated in this operation they fund capital improvements either out of cash carryovers or bonds, and he is curious as to how they determine what their net operating profit is, if take it before or after depreciation, don't want it to be accounting thing but wants State statute; that we can allocate 20% of our gross revenue, and be transferred and nothing to do with net operating income. Mr. Schmisek stated that you have to determine your sufficient fund balance, not a matter of net income; your determina-tion is that you determine whether you have sufficient fund balance in your Enterprise Funds and at that point can take 20% of your revenue. Christensen asked for the fund balance; Mr. Martin stated Sewer, $77 million of net assets and included in that is your fixed assets of $72 million and reserve restricted for debt service of $3.4 million and unrestricted is $2 million. Mr. Schmisek stated that in Sewer their est. is $1.3 or $1.2 million and is 25% of expenditures. Christensen stated that the operating expenses are under Sewer at $3.428,000 and 25% of that and gives $860,000. The city auditor stated they usually calculate it on the budget expense which includes capital expenditures. Mr. Martin stated capital expenditures on page 32, under Sewer Fund acquisition of construction of capital assets about $3.1 million. Christensen stated that is something they will be exploring and need lot more conversation; and asked if they had any recommendation as to what an appropriate reserve is of operating expenses. Mr. Martin stated what you see is one rule of thumb is 3 months operating expenses which equates to 25% and GFOA's recommendation is from 15 to 25% range and somewhere in that range is where would like them to be. Mr. Johnke stated that some of that depends on the type of revenues that you have coming in, if are pretty stable can operate on less margin because don't have the volatility of revenue stream, if they are bouncing around probably need something a little higher reserve to cover those fluctuations. Christensen stated he would think that most of these Enterprise funds are stable.

Gershman asked what look like if taken $1.2 this year out of the Sewer Fund; Mr. Martin stated they would have about $800,000 of capital expenditures, what is your annual budget - Mr. Schmisek stated that keep in mind you want to reserve so take $800,000. Gershman asked if that would reoccur next year, automatically; Mr. Schmisek noted pretty much, stated you don't want to rely on it for operational expenses because doesn't know how you would want to set the policy up, almost have to go to prior years and decide what is available to you, can't count on it so don't want to fund operations based on it, want to know what transferring in.

Mr. Martin asked if there were any questions on the financial statements, that they have a management letter and recommendations that they will get through and couple other reports.

He stated they have a copy of the federal and separate report on federal programs and have issued a letter saying that they have tested all of the major federal programs for compliance with OMB Circular A133 and there were no instances of non-compliance noted; and also there is a landfill assurance report that is due to the State by the end of August and received that information today and will be getting that report out in the next week or so.

He stated the Management Report included two sets of communications, one is a letter that they are required to send to the finance or audit committee, that if there are any disagreements with management during the audit or if they had any issues with accounting treatment, disagreements, that they bring those to your attention, and are saying they didn't have any disagreements with management, no difficulties in getting the audit completed.

He stated they had some housekeeping items, 5 items they have noted, observations during the audit areas for improvement, none of these are real major issues but observations that they made to strengthen your internal control system.

1) That through some inquiries indicated that the council would like to get more detailed account information on several line items in the budget book, and recommending that the next budget book contain that detailed account information.

2) Alerus Center - segregation of duties, that the same employee who orders the food and beverage items also receives those items and when that happens, there is an opportunity that some things might not be accounted for, and recommending that be separated.

3) Alerus Center - re. inventory of the food and beverages - should update their inventory spread sheet based on the last invoice price, prices probably don't fluctuate that much and not that big difference but standard accounting procedure is that you update your listing based on the last price that you have - not using old invoices but always use current and that is an accounting procedure that should be in place.

4) Utility Billing - they noticed that when meter readers go out to read the meters they upload the information basically into the system and from there gets downloaded before it gets billed, what is happening is that once the information is in the file and before getting billed out the people that are doing the billing have the ability to go in and make changes to that data and no adjustment report or exception report printed so they could change that data and send out the bills and no one would know that data was changed; and are recommending that when that data is in that file before they bill it out, another report be printed that you can compare those two files to make sure that nothing was changed - if it was changed there is a valid reason why it was changed before it was billed so some kind of exception report or adjustment report. The city auditor stated that they have already worked with IS.

5) City Bus Department - they implemented a new fare collection system and as part of that wanted to remind them to have a report stating the number of people riding the bus and the amount of money deposited to match that; now bringing the money in, receipt written and deposited, two people looking at it but no report, and that should be part of the process and recommending that they implement that report and the new system should be able to generate that.

The city auditor stated when they looked at these, none are major issues but glitches that came up, the audit is expected to reveal some of these things so they can keep fine tuning them, the request for detail in the budget is between transfers in and out, and can put a summary page in there. The two at the Alerus are really process things and will work with them.

Hamerlik asked why these didn't come up last year; the city auditor stated that is because of the way auditors sample different items, Mr. Martin stated that they talk to different people and ask different questions and some things pop up one time and not another. Hamerlik asked Mr. Schmisek if he will report this to the Commission so that they are aware of it because they supervise the Compass group; Mr. Schmisek stated he will report it to their finance committee.

Mr. Martin stated that if any questions or concerns during the year, to give them a call at any time.

It was moved by Hamerlik and Gershman to accept the 2004 audit report, submit it to the state auditor's office and make final payment to the audit firm upon acceptance of audit by state auditor. Motion carried.

The meeting adjourned at approx. 4:00 p.m.

Alice Fontaine
City Clerk