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HomeMy WebLinkAbout2014 Management Report Management Report for City of Brooklyn Center, Minnesota December 31, 2014 THIS PAGE INTENTIONALLY LEFT BLANK To the City Council and Management City of Brooklyn Center, Minnesota We have prepared this management report in conjunction with our audit of the City of Brooklyn Center, Minnesota’s (the City) financial statements for the year ended December 31, 2014. The purpose of this report is to provide comments resulting from our audit process and to communicate information relevant to city finances in Minnesota. We have organized this report into the following sections: Audit Summary Governmental Funds Overview Enterprise Funds Overview Government-Wide Financial Statements Legislative Updates Accounting and Auditing Updates We would be pleased to further discuss any of the information contained in this report or any other concerns that you would like us to address. We would also like to express our thanks for the courtesy and assistance extended to us during the course of our audit. The purpose of this report is solely to provide those charged with governance of the City, management, and those who have responsibility for oversight of the financial reporting process comments resulting from our audit process and information relevant to city finances in Minnesota. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota May 18, 2015 THIS PAGE INTENTIONALLY LEFT BLANK AUDIT SUMMARY The following is a summary of our audit work, key conclusions, and other information that we consider important or that is required to be communicated to the City Council, administration, or those charged with governance of the City. ORUASGAU URESPONSIBILITY NDERUDITING TANDARDS ENERALLY CCEPTED IN THE NITED SA,,U.S.O GAS OVERNMENT UDITING TANDARDS TATES OF MERICA AND THE FFICE OF MB(OMB)CA-133 ANAGEMENT AND UDGETIRCULAR 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 as of and for the year ended December 31, 2014, and the related notes to the financial statements. Professional standards require that we provide you with information about our responsibilities under auditing standards generally accepted in the United States of America, Government Auditing Standards, and OMB Circular A-133, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you verbally and in our audit engagement letter. Professional standards also require that we communicate the following information related to our audit. PSTA LANNEDCOPE AND IMING OF THE UDIT We performed the audit according to the planned scope and timing previously discussed and coordinated in order to obtain sufficient audit evidence and complete an effective audit. AOF UDITPINION AND INDINGS Based on our audit of the City’s financial statements for the year ended December 31, 2014: We have issued an unmodified opinion on the City’s basic financial statements. We reported no deficiencies in the City’s internal control over financial reporting that we considered to be material weaknesses. The results of our testing disclosed no instances of noncompliance required to be reported under Government Auditing Standards. We reported that the Schedule of Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial statements. The results of our tests indicate that the City has complied, in all material respects, with the types of compliance requirements that could have a direct and material effect on each of its major federal programs. We reported no deficiencies in the City’s internal controls over compliance with the types of compliance requirements that could have a direct and material effect on each of its major federal programs. We reported no findings based on our testing of the City’s compliance with Minnesota laws and regulations. -1- F-UPYFR OLLOWP ON RIOREARINDINGS AND ECOMMENDATIONS As a part of our audit of the City’s financial statements for the year ended December 31, 2014, we performed procedures to follow-up on the findings that resulted from our prior year audit. We reported the following two findings that were corrected by the City in the current year: 1.In our previous audit, we reported that the City did not obtain the required documentation of either a withholding affidavit or Commissioner of Revenue Form IC-134 before making final settlement with any contractor under a contract requiring the employment of employees for wages. As part of our follow-up procedures, we are pleased to report that this was not a current year finding. 2.In our previous audit, we also reported that the City did not pay each vendor obligation according to the terms of each contract or within 35 days after the receipt of the goods or services or the invoice for the goods or services. As part of our follow-up procedures, we are pleased to report that this was not a current year finding. SAP IGNIFICANT CCOUNTING OLICIES 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 of the notes to basic financial statements. During the year ended December 31, 2013, the City implemented Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. GASB Statement No. 65 identified specific items previously reported as assets that will now be classified as either deferred outflows of resources or outflows (expenditures/expenses), and items previously reported as liabilities that will now be reported as either deferred inflows of resources or inflows (revenues). For the year ended December 31, 2013, the City had reported balances of assets held for resale as a deferred inflow of resources, similar to reporting prior to GASB Statement No. 65, as deferred revenue. However, under GASB Statement No. 65, the reporting of the balances should be included in equity. Therefore, the City determined it was necessary to restate the beginning fund balances for the Economic Development Authority and the Tax Increment District No. 3 special revenue funds of the City. 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 financial statements in the proper period. AEMJ CCOUNTING STIMATES AND ANAGEMENT UDGMENTS 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 – Management’s estimates of depreciation expense are based on the estimated useful lives of the assets. Net Other Post-Employment Benefit (OPEB) Liabilities – Actuarial estimates of the net OPEB obligation is based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. Compensated Absences – Management’s estimate is based on current rates of pay and sick leave balances. Land Held for Resale – Management’s estimates of this asset are based on net realizable value (lower of cost or estimated sales price). -2- We evaluated the key factors and assumptions used to develop these accounting estimates in determining that they are reasonable in relation to the basic financial statements taken as a whole. The financial statement disclosures are neutral, consistent, and clear. CUM ORRECTED AND NCORRECTEDISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Where applicable, management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management, when applicable, were material, either individually or in the aggregate, to each opinion unit’s financial statements as a whole. We proposed one uncorrected audit adjustment to the financial statements for the reporting of governmental activities and business-type activities unamortized premiums and discounts on bond proceeds totaling $185,253 and $17,233 respectively. Management has determined that the effects of these items are immaterial, both individually and taken together, to each opinion unit’s financial statements taken as a whole. DEPA IFFICULTIES NCOUNTERED IN ERFORMING THE UDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. DWM ISAGREEMENTSITHANAGEMENT For purposes of this report, professional standards define a disagreement with management as 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. MR ANAGEMENTEPRESENTATIONS We have requested certain representations from management that are included in the management representation letter dated May 18, 2015. MCWOIA ANAGEMENTONSULTATIONS ITH THERNDEPENDENTCCOUNTANTS 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. OAFI THERUDIT INDINGS OR SSUES 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. -3- OM THERATTERS We applied certain limited procedures to the Management’s Discussion and Analysis and the Schedule of Funding Progress – Other Post-Employment Benefit Plan, which are required supplementary information (RSI) that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were engaged to report on the combining and individual fund statements and schedules accompanying the financial statements and the separately issued Schedule of Expenditures of Federal Awardswhich are not RSI. With respect to this information, 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 combining and individual fund statements and schedules and Schedule of Federal Expenditures of Awards to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. We were not engaged to report on the introductory section and statistical section which accompany the financial statements but are not RSI. We did not audit or perform other procedures on this other information and we do not express an opinion or provide any assurance on it. -4- GOVERNMENTAL FUNDS OVERVIEW This section of the report provides you with an overview of the financial trends and activities of the City’s governmental funds, which includes the General Fund, special revenue, debt service, and capital project funds. These funds are used to account for the basic services the City provides to all of its citizens, which are financed primarily with property taxes. The governmental fund information in the City’s financial statements focuses on budgetary compliance, and the sufficiency of each governmental fund’s current assets to finance its current liabilities. PT ROPERTYAXES Minnesota cities rely heavily on local property tax levies to support their governmental fund activities. For the 2013 fiscal year, local property tax levies provided 41.1 percent of the total governmental fund revenues for cities over 2,500 in population, and 35.5 percent for cities under 2,500 in population. Property tax levies certified by Minnesota cities for 2014 increased about 1.6 percent over 2013, compared to an increase of 2.3 percent the prior year. This moderate increase was due in part to a one-year levy limit for 2014 imposed on cities over 2,500 in population. The total market value of Minnesota cities increased about 1.1 percent for the 2014 levy year, ending a four-year trend of declining market values that began in 2010 and peaked with a state-wide decline of about 8.8 percent for levy year 2012. Market values showed modest increases in all property categories for 2014, with the largest gains in agricultural and non-homestead residential properties. Because the assessed valuation used for levying property taxes is based on values from the previous fiscal year (e.g. the market value for taxes payable in 2014 is based on estimated values as of January 1, 2013), market value improvement has lagged behind recent upturns in the housing market and the economy in general. The City’s taxable market value decreased 8.8 percent for taxes payable in 2013 and 0.7 percent for taxes payable in 2014. The following graph shows the City’s changes in taxable market value over the past 10 years: Taxable Market Value $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $– 2005200620072008200920102011201220132014 -5- Tax capacity is considered the actual base available for taxation. It is calculated by applying the state’s property classification system to each property’s market value. Each property classification, such as commercial or residential, has a different calculation and uses different rates. Consequently, a city’s total tax capacity will change at a different rate than its total market value, as tax capacity is affected by the proportion of the City’s tax base that is in each property classification from year-to-year, as well as legislative changes to tax rates. The City’s tax capacity decreased 7.0 percent and 0.8 percent for taxes payable in 2013 and 2014, respectively. The following graph shows the City’s change in tax capacities over the past 10 years: Tax Capacity $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $– 2005200620072008200920102011201220132014 The following table presents the average tax rates applied to city residents for each of the last two levy years, along with comparative state-wide and metro area rates. Rates expressed as a percentage of net tax capacity City of All CitiesSeven-County Brooklyn Center State-WideMetro Area 20132014 2013201420132014 Average tax rate 74.171.1 City48.8 48.8 46.1 46.0 50.049.5 County48.5 47.6 47.1 46.6 39.839.1 School28.5 28.9 30.3 30.9 12.211.3 Special taxing7.2 7.3 9.4 9.5 176.1170.9 Total133.0 132.6132.9133.0 Both the City’s portion and the total tax capacity rates for Brooklyn Center residents are significantly higher than the state-wide and metro area averages the last two years. These rates are higher than average due to a combination of factors, including lower than average property values, makeup of residential properties, and the use of tax increments within the City. -6- GFRAE OVERNMENTAL UNDS EVENUENDXPENDITURES The following table presents the per capita revenue of the City’s governmental funds for the past three years, along with state-wide averages. We have included the most recent comparative state-wide averages available from the Office of the State Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical major sources of governmental fund revenue will naturally vary between cities based on factors such as the City’s stage of development, location, size and density of its population, property values, services it provides, and other attributes. It will also differ from year-to-year due to the effect of inflation and changes in the City’s operation. Also, certain data on these tables may be classified differently than how they appear on the City’s financial statements in order to be more comparable to the state-wide information, particularly in separating capital expenditures from current expenditures. We have designed this section of our management report using per capita data in order to better identify unique or unusual trends and activities of your city. We intend for this type of comparative and trend information to complement, rather than duplicate, information in the Management’s Discussion and Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population count, which for most years is based on estimates. Governmental Funds Revenue per Capita With State-Wide Averages by Population Class City of Brooklyn Center State-Wide 201220132014 YearDecember 31, 2013 20,000–100,00030,56930,42630,426 Population2,500–10,00010,000–20,000 $ 471423$ 496$ 494$ Property taxes422$ 388$ 8840 104 125 Tax increments30 42 5034 50 51 Franchise fees and other taxes31 39 4272 62 59 Special assessments63 58 2838 36 34 Licenses and permits27 26 118148 104 89 Intergovernmental revenues253 268 3591 35 40 Charges for services109 84 3630 22 30 Other 3356 $ 868876$ 909$ 922$ Total revenue991$ 938$ The City relies more on property tax revenue for its governmental funds revenue compared to the average Minnesota city. The City continues to generate significantly more tax increment revenue per capita than average, as it has made extensive use of this tool to finance commercial development. The City’s per capita governmental funds revenue for 2014 was $922, an increase of about 1.4 percent from the prior year. This was primarily due to an increase in tax increments and other revenue offset by a decrease in intergovernmental revenue. Tax increments revenue increased $21 per capita due to the recent redevelopment in the tax increment financing districts. Other revenue increased $8 per capita mainly due to increased investment earnings. These increases were offset by the decrease in intergovernmental revenue, which decreased $15 per capita. During 2013, the City was awarded Community Block Grant and Neighborhood Stabilization Program Grant funds. The funding available for both of these grant funds was reduced in 2014. -7- The expenditures of governmental funds will also vary from state-wide averages and from year-to-year, based on the City’s circumstances. Expenditures are classified into three types as follows: Current – These are typically the general operating type expenditures occurring on an annual basis, and are primarily funded by general sources, such as taxes and intergovernmental revenues. Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more typically fluctuating significantly from year-to-year. Many of these expenditures are project-oriented, and are often funded by specific sources that have benefited from the expenditure, such as special assessment improvement projects. Debt Service – Although the expenditures for debt service may be relatively consistent over the term of the respective debt, the funding source is the important factor. Some debt may be repaid through specific sources such as special assessments or redevelopment funding, while other debt may be repaid with general property taxes. The City’s expenditures per capita of its governmental funds for the past three years, together with state-wide averages, are presented in the following table: Governmental Funds Exenditureser Caita ppp With State-Wide Averages by Population Class Cit of Brookln Center State-Wideyy 201220132014 YearDecember 31, 2013 20,000–100,00030,56930,42630,426 Population2,500–10,00010,000–20,000 Current $ 9783$ 100$ 104$ General government129$ 100$ 297239 300 316 Public safety244 235 6591 65 69 Street maintenance123 121 8385 82 81 Parks and recreation83 99 18591 119 111 All other66 73 $ 727589$ 666$ 681$ 628645 $$ Capital outlay $ 23219$ 284$ 130$ and construction303 288 $$ Debt service $ 87102$ 87$ 63$ Principal164$ 133$ 2639 29 27 Interest and fiscal55 43 $ 113141$ 116$ 90$ $ 176219$ $ 863949$ 1,066$ 901$ Total expenditures1,167 1,092 $$ The City’s governmental funds current per capita expenditures are higher than state-wide averages for cities in the same population class. The City’s current operating costs are higher than average due to above average general government and public safety costs. The City’s per capita current expenditures increased $15 per capita in 2014. Capital outlay costs per capita decreased $154 as a result of the Kylawn Project in the prior year and the City purchasing Brookdale Square in the prior year. Debt service costs per capita decreased $26 as a result of scheduled bond payments. -8- GFB OVERNMENTAL UNDALANCES The following table summarizes the changes in the fund balances of the City’s governmental funds during the year ended December 31, 2014, presented both by fund balance classification and by fund: Governmental Funds Change in Fund Balance Fund Balance as of December 31, Increase 20142013 (As Restated)(Decrease) Fund balances of governmental funds Total by classification Nonspendable21,967$ 26,139$ (4,172)$ 83,791 Restricted26,434,113 26,350,322 2,935,183 Committed10,514,871 7,579,688 (1,845,363) Assigned908,761 2,754,124 155,521 Unassigned8,325,476 8,169,955 $ 44,880,22846,205,188$ 1,324,960$ Total – governmental funds Total by fund General11,020,081$ 12,382,713$ (1,362,632)$ 70,758 Tax Increment District No. 317,898,749 17,827,991 132,636 Tax Increment District No. 5(1,299,859) (1,432,495) 718,469 Debt Service1,909,441 1,190,972 3,436,472 Capital Improvements6,509,230 3,072,758 (493,622) Municipal State Aid for Construction1,830,100 2,323,722 (1,433,335) Infrastructure Construction(463,193) 970,142 256,214 Nonmajor funds8,800,639 8,544,425 $ 44,880,22846,205,188$ 1,324,960$ Total – governmental funds In total, the fund balances of the City’s governmental funds increased by $1,324,960 during the year ended December 31, 2014. The majority of the increase was in committed fund balances offset by a decrease in assigned fund balances. Fund balances committed for capital improvements increased $3,436,472 and fund balances assigned for capital improvements decreased $1,845,363. Both of these changes were a result of a new Capital Project Funding Policy approved by the City Council to provide a recurring source of funding for the City’s Capital Improvement Plan. For the year ended December 31, 2013, the City had reported balances of assets held for resale as a deferred inflow of resources, similar to reporting prior to GASB Statement No. 65, as deferred revenue. However, under GASB Statement No. 65, the reporting of the balances should be included in equity. Therefore, the City determined it was necessary to restate the beginning fund balances for the Economic Development Authority and the Tax Increment District No. 3 Special Revenue Funds. The fund balance as of December 31, 2013 in the table above has been restated to reflect this change. -9- GF ENERALUND The City’s General Fund accounts for the financial activity of the basic services provided to the community. The primary services included within this fund are the administration of the municipal operation, police and fire protection, building inspection, streets and highway maintenance, and parks and recreation. The graph below illustrates the change in the General Fund financial position over the last 10 years. We have also included a line representing annual expenditures to reflect the change in the size of the General Fund operation over the same period. General Fund Financial Position Year Ended December 31, $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $– 2005200620072008200920102011201220132014 Fund Balance Cash and Investments (Net of Interfund Borrowing) Expenditures The City’s General Fund cash and investments balance (net of interfund borrowing) at December 31, 2014 was $11,754,777, which decreased $1,283,185 from 2013. Total fund balance at December 31, 2014 was $11,020,081, down $1,362,632 from the prior year. Having an appropriate fund balance is an important factor in assessing the City’s financial health because a government, like any organization, requires a certain amount of equity to operate. Generally, the amount of equity required typically increases as the size of the operation increases. A healthy financial position allows the City to avoid volatility in tax rates; helps minimize the impact of state funding changes; allows for the adequate and consistent funding of services, repairs, and unexpected costs; and can be a factor in determining the City’s bond rating and resulting interest costs. The City has an approved fund balance policy that states the General Fund will manage its cash flow by having a year-end target unassigned fund balance of between 50 percent and 52 percent of next year’s General Fund budgeted expenditures. At December 31, 2014, the City’s General Fund had an unassigned fund balance of 52 percent of the subsequent year’s budgeted expenditures. -10- The following graph reflects the City’s General Fund revenue sources for 2014 compared to budget: General Fund Revenue Taxes Licenses and Permits Intergovernmental Charges for Services Other BudgetActual Total General Fund revenues for 2014 were $18,865,622, which was $549,372 (3.0 percent) over the final budget. The majority of this variance was from licenses and permits and intergovernmental revenue. Licenses and permits revenue was $277,742 over budget from more than anticipated building-related activities. Intergovernmental revenue was $147,647 over budget due to the police aid, law enforcement training grant, and fire aid being more than anticipated in the budget. The following graph presents the City’s General Fund revenues by source for the last five years. The graph reflects the City’s reliance on property taxes and other local sources of revenue, and shows the lack of general state aid revenue in recent years. General Fund Revenue by Source Year Ended December 31, $16,500,000 $15,000,000 $13,500,000 $12,000,000 $10,500,000 $9,000,000 $7,500,000 $6,000,000 $4,500,000 $3,000,000 $1,500,000 $– TaxesIntergovernmentalOther 20102011201220132014 Overall, General Fund revenues increased $99,912 (0.5 percent) from the previous year. Intergovernmental revenue increased $315,285 due to increased local government aid received. This increase was offset by a decrease in other revenue of $189,912 mainly in charges for services. Charges for services related to private security contracts with individual businesses, vacant building registrations, rental conversions, and daily admissions at the Community Center were all lower when compared to the prior year. -11- The following graph illustrates the components of General Fund spending for 2014 compared to budget: General Fund Expenditures General Government Public Safety Public Works Parks and Recreation Other BudgetActual Total General Fund expenditures for 2014 were $17,503,674, which was $862,576 (4.7 percent) less than budget. The largest areas under budgeted amounts were public safety expenditures ($548,188) and general government expenditures ($237,663). Public safety expenditures were under budget in the police protection department due to open staff positions during the year. General government expenditures were under budget in the government buildings and assessing departments. General government buildings had savings due to open staff positions during the year and the assessing department experienced savings from the City opting to contract for these services from Hennepin County rather than having their own department and employees. The following graph presents the City’s General Fund expenditures by function for the last five years. General Fund Expenditures by Function Year Ended December 31, $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $– GeneralPublic SafetyPublic WorksParks andOther GovernmentRecreation 20102011201220132014 General Fund expenditures increased by $397,430, or 2.3 percent, from the prior year, mainly due to the $511,019 increase in the public safety function offset by the $153,927 decrease in general government expenditures. Public safety expenditures increased mainly due to increased personal services. The decrease in the general government function was mainly due to open staff positions during the year and the City opting to contract for assessing services with Hennepin County rather than having their own department and employees as noted above. -12- ENTERPRISE FUNDS OVERVIEW The City maintains several enterprise funds to account for services the City provides that are financed primarily through fees charged to those utilizing the service. This section of the report provides you with an overview of the financial trends and activities of the City’s enterprise funds, which includes the Municipal Liquor, Golf Course, Earle Brown Heritage Center, Water Utility, Sanitary Sewer Utility, Storm Drainage Utility, Street Light Utility, and Recycling Utility Funds. The utility funds comprise a considerable portion of the City’s activities. These funds significantly help to defray overhead and administrative costs and provide additional support to general government operations by way of annual transfers. We understand that the City is proactive in reviewing these activities on an ongoing basis and we want to reiterate the importance of continually monitoring these operations. Over the years, we have emphasized to our city clients the importance of these utility operations being self-sustaining, preventing additional burdens on general government funds. This would include the accumulation of net position for future capital improvements and to provide a cushion in the event of a negative trend in operations. EFFP NTERPRISEUNDSINANCIAL OSITION The following table summarizes the changes in the financial position of the City’s enterprise funds during the year ended December 31, 2014, presented both by classification and by fund: Enterprise Funds Change in Financial Position Net Position as of December 31,Increase 20142013(Decrease) et position of enterprise funds N Total by classification Net investment in capital assets48,537,132$ 42,466,488$ 6,070,644$ Unrestricted7,164,916 12,546,185 (5,381,269) $ 55,012,67355,702,048$ 689,375$ Total – enterprise funds Total by fund Municipal Liquor$ 2,685,4122,512,431$ (172,981)$ Golf Course751,336 657,068 94,268 Earle Brown Heritage Center5,519,579 6,065,638 (546,059) Water Utility12,120,465 11,709,616 410,849 Sanitary Sewer Utility13,668,176 13,204,689 463,487 Storm Drainage Utility 19,874,02220,086,788 212,766 Street Light Utility963,994 752,477 211,517 Recycling Utility79,279 63,751 15,528 $ 55,012,67355,702,048$ 689,375$ Total – enterprise funds In total, the net position of the City’s enterprise funds increased by $689,375 during the year ended December 31, 2014. As noted above, all of the City’s enterprise funds had positive operating results with the exception of the Municipal Liquor and Earle Brown Heritage Center Funds. The significant increase in net investment in capital assets and the decline in unrestricted net position relates to the significant acquisition of capital assets in the Water, Sanitary Sewer, and Storm Drainage Funds in fiscal 2014. -13- Water Fund The following graph presents 10 years of operating results for the Water Fund: Water Fund Year Ended December 31, $2,500,000 $2,250,000 $2,000,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 $500,000 $250,000 $– $(250,000) 2005200620072008200920102011201220132014 Operating Revenue Operating Expenses Project Costs Operating Income (Loss), Excluding Project Costs The Water Fund ended 2014 with a net position of $12,120,465, an increase of $410,849 from the prior year. Of this, $14,942,429 represents the investment in utility distribution system capital assets, leaving a deficit of ($2,821,964) in unrestricted net position. The deficit unrestricted net position balance is a result of expenses for the construction of the water treatment plant in the current year. The City issued a Taxable General Obligation Water Revenue Note in January 2015 to finance this construction. Water Fund operating revenue was $2,206,311 for 2014, a decrease of $69,456 (3.1 percent) from the prior year due to decreased water consumption offset by the increase in rates in the current year. Operating expenses of $1,838,841 were $128,116 (6.5 percent) less than last year due to fewer costs associated with a manganese action plan and fewer water main breaks during the current year. -14- Sanitary Sewer Fund The following graph presents 10 years of operating results for the Sanitary Sewer Fund: Sanitary Sewer Fund Year Ended December 31, $4,000,000 $3,800,000 $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 $– $(200,000) 2005200620072008200920102011201220132014 Operating Revenue Operating Expenses Project Costs Operating Income (Loss), Excluding Project Costs The Sanitary Sewer Fund ended 2014 with a net position of $13,668,176, an increase of $463,487 from the prior year. Of this, $11,342,025 represents the investment in the sanitary sewer capital assets, leaving $2,326,151 of unrestricted net position. Sanitary Sewer Fund operating revenues for 2014 were $3,945,115, which was an increase of $269,179 (7.3 percent) from the prior year, due to an approved rate increase offset by a decrease in consumption. Operating expenses for 2014 were $3,496,064, which was an increase of $127,544 (3.8 percent) from the prior year. The largest operating expense of this fund is to Metropolitan Council Environmental Services (MCES) for sewer service charges. MCES disposal charges in 2014 increased by $42,244 from the prior year. The remainder of the increase in operating costs is due to the City televising the sanitary sewer lines in the current year. -15- Storm Drainage Fund The following graph presents 10 years of operating results for the Storm Drainage Fund: Storm Drainage Fund Year Ended December 31, $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 $– $(200,000) 2005200620072008200920102011201220132014 Operating Revenue Operating Expenses Operating Income (Loss) The Storm Drainage Fund ended 2014 with a net position of $20,086,788, an increase of $212,766 from the prior year. Of this, $15,805,594 represents the net investment in capital assets, leaving $4,281,194 of unrestricted net position. Storm Drainage Fund operating revenues for 2014 were $1,638,475, which was a slight increase of $16,563 from the prior year. Operating expenses for 2014 were $1,787,064, which was $230,706 higher than the prior year due to costs associated with the City updating/implementing their Storm Water Management Plan and increased costs for dredging out storm water ponds in the current year. -16- OEF THERNTERPRISE UNDS Liquor Fund The following graph presents 10 years of operating results for the Liquor Fund: Liquor Fund Year Ended December 31, $6,500,000 $6,000,000 $5,500,000 $5,000,000 $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 $– 2005200620072008200920102011201220132014 Sales Cost of Sales Operating Expenses Operating Income (Loss) The Liquor Fund ended 2014 with a net position of $2,512,431, a decrease of $172,981 from the prior year due to the $362,190 transfer to the Capital Improvement Fund as a result of a new Capital Project Funding Policy approved by the City Council. Of the net position balance, $136,583 represents the investment in liquor capital assets, leaving $2,375,848 of unrestricted net position. Liquor sales for 2014 were $5,852,465, which is $210,766 (3.5 percent) lower than the prior year. The Liquor Fund generated operating income of $204,959 in 2014, or about 3.5 percent of gross sales, which is a decrease from the 6.4 percent of gross sales in fiscal 2013. The Liquor Fund gross profit margin was 26.64 in fiscal 2014, which is lower than the average gross profit margin of 27.74 seen over the previous five years. -17- Earle Brown Heritage Center Fund The following graph presents 10 years of operating results for the Earle Brown Heritage Center Fund: Earle Brown Heritage Center Fund Year Ended December 31, $5,000,000 $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 $– $(500,000) $(1,000,000) 2005200620072008200920102011201220132014 Sales and User Fees Operating Expenses Cost of Sales Operating Income (Loss) The Earle Brown Heritage Center Fund ended 2014 with a net position of $5,519,579, a decrease of $546,059 from the prior year. Of the net position balance, $3,927,364 represents investments in Earle Brown Heritage Center capital assets, leaving $1,592,215 of unrestricted net position. Earle Brown Heritage Center Fund sales and user fees for 2014 were $4,518,231, which is $246,653 (5.8 percent) higher than last year. The increase is due to the increased number of events held at the facility in 2014 compared to the prior year. Operating expenses for 2014 were $3,048,763, an increase of $352,466 from the prior year. The increase in operating expenses is directly related to the increased revenues in the current year, additional repair and maintenance costs, and costs of the installation of a video surveillance system in the current year. During fiscal 2014, this fund experienced depreciation expense totaling $683,625. -18- Golf Course Fund The following graph presents 10 years of operating results for the Golf Course Fund: Golf Course Fund Year Ended December 31, $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $– $(50,000) $(100,000) $(150,000) 2005200620072008200920102011201220132014 Operating Revenue Operating Expenses Operating Income (Loss) The Golf Course Fund ended 2014 with a net position of $751,336, an increase of $94,268 from the prior year. Of this, $1,694,893 represents the investment in golf course land and capital assets, leaving a deficit of ($943,557) in unrestricted net position. Golf Course Fund operating revenues for 2014 were $183,311, which is $16,031 more than last year. Operating expenses for 2014 were $271,229, up $6,970 from the prior year. On an annual basis, this fund has had to borrow from other funds to fund cash flow needs. This interfund borrowing totals $946,298 at December 31, 2014. We recommend that the City continue to monitor the financial results in this fund. We also recommend that the City continue to update the long-range financial plan for this fund, including considering alternate plans for financing the payback of the interfund borrowing in this fund. -19- GOVERNMENT-WIDE FINANCIAL STATEMENTS In addition to fund-based information, the current reporting model for governmental entities also requires the inclusion of two government-wide financial statements designed to present a clear picture of the City as a single, unified entity. These government-wide financial statements provide information on the total cost of delivering services, including capital assets and long-term liabilities. SNP TATEMENT OF ETOSITION The Statement of Net Position essentially tells you what your city owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to use for providing services after its debts are settled. However, those resources are not always in spendable form, or there may be restrictions on how some of those resources can be used. Therefore, the Statement of Net Position divides the net position into three components: Net Investment in Capital Assets – The portion of net position reflecting equity in capital assets (i.e. capital assets minus related debt). Restricted Net Position – The portion of net position equal to resources whose use is legally restricted minus any noncapital-related liabilities payable from those same resources. Unrestricted Net Position – The residual balance of net position after the elimination of net investment in capital assets and restricted net position. The following table presents the components of the City’s net position as of December 31, 2014 and 2013 for governmental activities and business-type activities: As of December 31,Increase (Decrease) 20142013 Net position Governmental activities Net investment in capital assets42,947,577$ 42,281,203$ 666,374$ Restricted28,061,977 27,219,086 842,891 Unrestricted12,357,196 11,205,289 1,151,907 Total governmental activities83,366,750 80,705,578 2,661,172 Business-type activities Investment in capital assets48,537,132 42,466,488 6,070,644 Unrestricted6,819,765 12,208,126 (5,388,361) Total business-type activities55,356,897 54,674,614 682,283 $ 135,380,192138,723,647$ 3,343,455$ Total net position The City’s total net position at December 31, 2014 was $3,343,455 higher than the previous year-end. Of the increase, $2,661,172 came from governmental activities and $682,283 came from business-type activities. The increase in both of these is due to the positive operating results of the City as a whole. -20- SA TATEMENT OF CTIVITIES The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other transactions that increase or reduce total net position. These amounts represent the full cost of providing services. The Statement of Activities provides a more comprehensive measure than just the amount of cash that changed hands, as reflected in the fund-based financial statements. This statement includes the cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses. The following table presents the change in the net position of the City for the years ended December 31, 2014 and 2013: 20142013 Program ExpensesRevenuesNet ChangeNet Change Net (expense) revenue Governmental activities $ 651,1883,736,487$ (3,085,299)$ (2,375,085)$ General government 1,869,18210,186,645 (8,317,463) (7,687,631) Public safety Public works 1,928,9333,688,238 (1,759,305) 139,704 –145,503 (145,503) (141,431) Community service 677,2462,977,707 (2,300,461) (1,846,262) Parks and recreation Economic development 898,9533,234,623 (2,335,670) (1,976,335) –887,190 (887,190) (490,162) Interest on long-term debt Business-type activities Municipal liquor 5,861,0665,690,792 170,274 397,397 365,497271,698 93,799 (95,770) Golf course 4,578,4335,137,712 (559,279) (540,408) Earle Brown Heritage Center Water utility 2,282,9921,900,518 382,474 332,261 3,958,4213,514,687 443,734 306,320 Sanitary sewer utility 1,638,5751,784,907 (146,332) 69,685 Storm drainage utility Recycling utility 306,661291,239 15,422 160,391 454,958245,426 209,532 8,827 Street light utility $ 25,472,10543,693,372$ (18,221,267) (13,738,499) Total net (expense) revenue General revenues Property taxes 14,943,00814,988,007 3,098,6203,790,363 Tax increments 881,252914,651 Lodging taxes Grants and contributions not restricted to specific programs 590,9161,499,015 (108,661)345,586 Unrestricted investment earnings Gain on disposal of capital assets 54,21127,100 Total general revenues21,564,722 19,459,346 $ 5,720,8473,343,455$ Change in net position One of the goals of this statement is to provide a side-by-side comparison to illustrate the difference in the way the City’s governmental and business-type operations are financed. The table clearly illustrates the dependence of the City’s governmental operations on general revenues, such as property taxes and unrestricted grants. It also shows if the City’s business-type activities are generating sufficient program revenues (service charges and program-specific grants) to cover expenses. This is critical given the current downward pressures on the general revenue sources. -21- LEGISLATIVE UPDATES The 2014 legislative session began with a projected budget excess for the remainder of the biennium of $1.09 billion, later revised upward to a projected excess of $1.23 billion in the February 2014 economic forecast. The Legislature utilized a portion of the projected excess to bolster the state’s financial condition; repaying $246 million “borrowed” from K–12 education through previous financing shifts, and using $150 million to replenish the state “Rainy Day Fund” budget reserve. The Legislature also approved increases to future funding for local government aid, and expanded the sales tax exemption approved for cities in 2013 to include joint powers entities and other instrumentalities of local government. The following is a summary of recent legislation affecting Minnesota cities in 2014 and into the future: Local Government Aid (LGA) – The Legislature completely overhauled the LGA formula for fiscal year 2014 and thereafter, creating a three-tiered formula that includes separate “need factor” calculations for cities with populations under 2,500, between 2,500 and 10,000, or over 10,000. The new formula simplified the LGA calculation, and reduced the volatility of the LGA distribution by limiting the amount it may decline in a given year. Under the new formula, the minimum LGA 2014 distribution for each city was an amount equal to their 2013 LGA. Beginning in 2015, any reduction to a city’s calculated LGA distribution will be limited to the lesser of $10 per capita, or 5 percent of their previous year net tax levy. For cities that gain under the new formula, the increases will be distributed proportionate to their unmet need, as determined by the new “need factor” calculations. The state-wide LGA appropriation was $507.6 million for fiscal 2014, $516.9 million for 2015, and $519.4 million for fiscal 2016 and thereafter. Sales Tax Exemption – Cities are exempted from paying sales tax on qualifying purchases, effective for purchases made on or after January 1, 2014. Purchases of goods or services by an exempt local government for a publically provided liquor store, gas or electric utility, golf course, marina, campground, café, laundromat, solid waste hauling or recycling operation, or landfill will remain taxable. The definition of “cities” for this statute include both home-rule and statutory cities. The 2014 Legislature extended the definition of tax exempt local government to include all special district; city, county, or township instrumentalities; economic development authorities; housing and redevelopment authorities; and all joint power boards or organizations. However, this expanded exemption list is not effective until January 1, 2016. Proposed Property Tax Levy Certification Date – The deadline for cities to certify their proposed annual tax levies was extended from September 15 to September 30. Agricultural Homestead Market Value Credit – The rate of agricultural homestead market value was increased to a maximum of $490 at a market value of $270,000 and over. Capital Investment Act Requirements – The Legislature approved capital improvement projects totaling about $1.1 billion under two separate capital investment (bonding) acts. Both require that, to the extent practicable, a public entity receiving an appropriation of public money for a project under these acts must assure those facilities are built with American-made steel. Authority to Inspect Public Buildings and State-Licensed Facilities – A formal delegation process was established that must be used by the state Department of Labor and Industry (DLI) when delegating the authority to inspect public buildings and state-licensed facilities to local building officials. The new provisions did not alter the circumstances under which the DLI is required to delegate this authority in most circumstances, only the process to be followed. However, for certain smaller construction projects designated as “reserved projects,” the DLI is now required to delegate inspection authority to any municipality with a designated building official without going through the formal delegation process. -22- Open Meeting Law – A change was made to the Open Meeting Law to clarify that the use of social media by members of a public body does not violate the Open Meeting Law if the use is limited to exchanges open to the public. The new statute specifically excludes email but does not otherwise define the term social media. Deputy Registrar Residency – The statutory requirement that an individual appointed as deputy registrar for a statutory or home-rule charter city be a resident of the county in which the city is located was repealed. Local Campaign Finance – Changes were made to increase the campaign contribution limits for local elections. For candidates in a territory with a population of 100,000 or less, the contribution limits were raised to $600 in an election year and $250 in a non-election year. For candidates in a territory with a population over 100,000, the limits were raised to $1,000 in an election year and $250 in a non-election year. In addition, all campaign finance reports required to be filed with a local government must now be published on the local government’s website, if the local government maintains a website. Data Practices – Several changes were made to address unauthorized access of private data by public employees, requiring local governments to: establish security measures to help ensure private data is only accessible to public employees whose work assignment reasonably requires access to the data, and that the data is only being accessed by those individuals for the purposes of their work assignment; follow the data breach reporting requirements that were previously only applicable to state agencies; and perform annual security assessments of personal information maintained by the entity. The statute also states that accessing private data without authorization is a misdemeanor, and willful violation by a public employee constitutes just cause for suspension without pay or dismissal. Part-Time Peace Officers – A change in the statutes now prohibits law enforcement agencies from hiring new part-time peace officers, existing part-time peace officers from transferring to new agencies, and the Peace Officer Standards and Training Board from licensing new part-time peace officers. Part-time peace officers that are currently employed may continue to serve indefinitely with their current employer, but must turn in their license upon leaving their current place of employment or otherwise becoming unemployed. Responsible Contractor Requirement – Contractors who bid on public contracts in excess of $50,000 are now required to certify that they are a “responsible bidder” in order to be awarded a contract as the lowest responsible bidder or best value alternative. A responsible contractor must be in compliance with various state and federal requirements for income tax, workers’ compensation, unemployment insurance, minimum wage, and safety. City solicitations for bid must include: the definition of “responsible contractor,” which may include criteria in addition to the statutory requirements established by the city, or reference to the statutory definition; a statement that a contractor failing to meet the criteria or verify compliance is ineligible to be awarded or perform work on the contract; a statement that submitting a false verification renders the contractor ineligible and can result in termination of the contract; and a statement requiring the contractor to provide copies of verification forms for all subcontractors upon request. Cities are not obligated to verify any of the information in the contractor verification; and have no liability if reasonably relying on the certification when awarding the contract, or declining to award the contract based on a reasonable determination that a contractor failed to verify compliance. Disaster Assistance Contingency Fund – A new state account was created to provide emergency cash flow for local governments located in counties declared federal disaster areas. The fund may be used to meet non-federal fund matching requirements to speed the availability of federal funds. -23- Pensions – A number of changes to the Public Employees Retirement Association (PERA) General Plan were adopted, including: The minimum salary threshold for inclusion into the PERA General Plan was changed from $425 in any one month to $5,100 on any year for non-school employees or $3,800 in any year for school employees. Employers are required to provide written notice to any employee excluded from membership in the PERA General Plan within two weeks of the determination on a form prescribed by the PERA executive director. PERA contribution rates for both employees and employers were increased by 0.25 percent of salary effective January 1, 2015. -24- ACCOUNTING AND AUDITING UPDATES GASBSN.68–—A AFRP CCOUNTING AND INANCIALEPORTING FOR ENSIONS TATEMENT ON AGASBSN.2750 MENDMENT OF TATEMENTOS AND The primary objective of this statement is to improve accounting and financial reporting by state and local governments for pensions.This statement replaces the requirements of GASB Statement Nos. 27 and No. 50, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements that meet certain criteria. The requirements of GASB Statement Nos. 27 and No. 50 remain applicable for pensions that are not covered by the scope of this statement. This statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expenses/expenditures. In addition, this statement details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. This statement also addresses circumstances in which a non-employer entity has a legal requirement to make contributions directly to a pension plan. This statement is effective for financial statements for fiscal years beginning after June 15, 2014. Earlier application is encouraged. Included in this statement are major changes in how employers that participate in cost-sharing pension plans, such as the Teachers’ Retirement Association (TRA) and PERA, account for pension benefit expenses and liabilities. In financial statements prepared using the economic resources measurement focus and accrual basis of accounting (government-wide and proprietary funds), a cost-sharing employer that does not have a special funding situation is required to recognize a liability for its proportionate share of the net pension liability of all employers with benefits provided through the pension plan. A cost-sharing employer is required to recognize pension expense and report deferred outflows of resources and deferred inflows of resources related to pensions for its proportionate share of collective pension expense and collective deferred outflows of resources and deferred inflows of resources related to pensions. In addition, the effects of (1) a change in the employer’s proportion of the collective net pension liability and (2) differences during the measurement period between the employer’s contributions and its proportionate share of the total of contributions from employers included in the collective net pension liability are required to be determined. These effects are required to be recognized in the employer’s pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all active and inactive employees that are provided with pensions through the pension plan. GASBSN.72– FVMA AIRALUEEASURE AND PPLICATION TATEMENT O GASB Statement No. 72 addresses accounting and financial reporting issues related to fair value measurements. The requirements of this statement are intended to enhance comparability among government financial statements by requiring certain assets and liabilities be reported at fair value, using a consistent definition of fair value and accepted valuation techniques. The requirements of this statement are effective for financial statements for periods beginning after June 15, 2015, with earlier application encouraged. GASB Statement No. 72 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally assumed to take place in the government’s principal or most advantageous market, taking into account the highest and best use for a nonfinancial asset, and assuming market participants would act in their economic best interest. The statement requires a government to use measurement techniques that are appropriate under the circumstances and for which sufficient data are available to measure fair value; consistent with a market, (replacement) cost, or income approach. It also establishes a hierarchy of inputs to be used in valuation techniques. -25- The statement establishes or clarifies the applicability of fair value measurement for certain assets and liabilities. Fair value is generally required for investments, defined as securities or other assets held primarily for the purpose of generating income, or which have a present service capacity based solely on their ability to generate cash. The statement requires measurement at acquisition value for donated capital assets, donated works of art, historical treasures, and capital assets received through a service concession arrangement. The statement also outlines the required financial statement disclosures about fair value measurements, valuation techniques, and the hierarchy of inputs used for valuation. CRFG HANGES TO EQUIREMENTS FOR EDERALRANTS In December 2013, the OMB issued Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Audits, which supersedes all or parts of eight OMB circulars; consolidating federal cost principles, administrative principles, and audit requirements in one document. The “Super Circular” includes a number of significant changes to the federal Single Audit process, including: an increase in dollar threshold for requiring a Single Audit from $500,000 to $750,000; changes to the thresholds and process used for determining major programs; reductions in the percentages of expenditures required to be covered by a Single Audit from 50 percent to 40 percent for high-risk auditees and from 25 percent to 20 percent for low-risk auditees; revised criteria for determining low-risk auditees; and an increase in the threshold for reporting questioned costs from $10,000 to $25,000. Auditees are required to implement the administrative requirements of the new “Super Circular” by December 26, 2014. The revised audit requirements will be effective for fiscal year 2015 city audits, with an optional one-year grace period for implementing the new procurement standards included in this guidance. -26- COSOICF NTERNAL ONTROLRAMEWORK The clarified auditing standards applicable to governmental audits incorporate a definition of internal control that is based on the internal control integrated framework developed and issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In May 2013, COSO issued an updated framework which supersedes the original after December 15, 2014. The new COSO framework retains the basic definition of internal control and its five components established in its original framework, along with the fundamental requirements to consider these five components and to use judgment when assessing and evaluating the effectiveness of a system of internal controls. The new COSO framework enhances and clarifies a number of concepts from the original framework to make it easier to use and apply. One of the more significant enhancements was the establishment of 17 principles, associated with the 5 components of internal control, intended to assist users in understanding the requirements of effective internal control and designing effective systems of internal control. The 5 components of internal control and 17 underlying principles are as follows: Control Environment – 1.Organization demonstrates a commitment to integrity and ethical values. 2.Governing body is independent from management and exercises oversight control. 3.Management establishes structure, reporting lines, authority, and responsibilities. 4.Organization demonstrates a commitment to the competence of individuals involved with internal control. 5.Organization holds individuals accountable for internal control responsibilities. Risk Assessment – 6.Organization specifies clear objectives for the identification and assessment of risks. 7.Organization identifies and analyzes risk. 8.Organization assesses the potential for fraud risks. 9.Organization identifies and assesses significant changes that could impact internal control. Control Activities – 10.Organization selects and develops control activities to mitigate risks. 11.Organization selects and develops general IT controls. 12.Organization establishes and implements control policies and procedures. Information and Communication – 13.Organization uses relevant, quality information to support internal control. 14.Organization communicates internal control information internally. 15.Organization communicates internal control information externally. Monitoring – 16.Organization conducts ongoing and/or separate internal control evaluations. 17.Organization evaluates and communicates deficiencies to responsible parties for corrective action. COSO defines an effective system of internal control as one that reduces to an acceptable level the risk of failing to achieve an organizational objective in the areas of operations, compliance, or reporting. According to the new framework, an organization can achieve effective internal control by applying all of the principles listed above. To achieve this, each of these five components and the relevant principles must be present and functioning, and the five components must operate in an integrated manner. Local governments should be reviewing their internal control systems to assure these principles have been incorporated and implemented. -27- THIS PAGE INTENTIONALLY LEFT BLANK