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06-24-13 CC WS MinutesCITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, JUNE 24, 2013 MINUTES 1. CONVENE CITY COUNCIL WORK SESSION 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 6:30 P.M. Mayor Zerby called the meeting to order at 6:32 P.M. A. Roll Call Present. Mayor Zerby; Councilmembers Hotvet, Siakel, Sundberg, and Woodruff, Administrator Joynes; Finance Director DeJong; Planning Director Nielsen, Director of Public Works Brown. Absent: None B. Review Agenda Woodruff moved, Hotvet seconded, approving the agenda as presented. Motion passed 5/0. 2. 2012 AUDIT PRESENTATION BY ABDO, EICK AND MEYERS, LLC Mayor Zerby noted Andy Berg, with the independent CPA firm of Abdo, Eick & Meyers, LLP, is present to provide an overview of the City of Shorewood's 2012 financial audit. He also noted that he had asked that this be done during a Council work session. He stated the 2012 Comprehensive Annual Financial Report (CAFR) will be formally accepted during Council's regular meeting immediately following this work session. Mr. Berg encouraged Council to ask questions during his presentation. He noted the firm he works for issued an unqualified (or clean) opinion on the financial statements. He explained there is one audit finding. There were not any compliance issues with Minnesota Statutes. He noted that management is responsible for the City's financial statements including the internal control over the financial statements. Mr. Berg explained the one 2012 material audit finding. The firm had to make a few audit adjustments that when added together are material. They were mostly related to year -end accrual entries on the City's revenue. He noted the firm did find significant improvement over the 2011 audit. For 2011 cash and investments were not reconciled. That piece of the fmding was removed. There was continued improvement with the 2012 audit entries and it's possible this finding will be eliminated for the 2013 audit. Mayor Zerby stated that in the past he has glossed over the findings. He now understands a finding to mean there is some cause for concern. He asked Mr. Berg to define finding. Mr. Berg clarified if during the audit there was a $100 problem here or there it would not be noted as a material fmding. The entries made were considered to be material and were at a level that the firm is required under auditing standards to report. If the audit entries were not made the City's financial data would not have been materially unfairly stated. Zerby asked Mr. Berg to describe things in more layman's terms. Mr. Berg stated when his firm came in to conduct the audit, the General Fund balance showed an increase of approximately CITY OF SHOREWOOD WORK SESSION MEETING MINUTES June 24, 2013 Page 2 of 5 $5,000. After the audit entries were made the increase was about $130,000. The audit entries were made in the May /June timeframe; they should have been made prior to the firm coming in. There was a fair amount of money shown in a liability account and it should have actually been reducing expenses. Expenses were overstated. Zerby asked if this incorrect reporting was a controls issue or was it record keeping. Mr. Berg noted that management's intention is for this finding to be gone in 2013. Mr. Berg explained that the firm gives management the audit entries and explains them. Director DeJong explained there was enough uncertainty about the status of some accounts, as he worked through details with a consultant who was providing assistance prior to the audit, that it was decided to wait until the audit to make sure things were clearly understood before making the entries. There are now very clear entries for the accruals for this year that staff can work off of when creating entries for accruals for next year. He noted the entries were not related to day -to -day transactions; it is year -end closing entries where there may be adjustments to account balances based on which year the revenues or expenditures should be recognized. Councilmember Woodruff stated it is common to have to make some adjustments during an audit. He then stated to him it sounds like Director DeJong and the consultant were not clear on how to make the accruals. Therefore, they waited for the auditor to give them advice. Councilmember Siakel stated in 2012 Council took action that allowed Director DeJong to bring in someone quarterly to help with financial oddities. She asked DeJong if he still thinks there is a need for outside help on a quarterly basis. Mr. Berg stated anytime there are questions throughout the year (e.g., a new bond issue or unusual transactions) clients can call him. For the more significant things like cash and investment reconciliation in 2012 the City brought in another accountant to help with that. He noted he does not know if the City plans on using the same consultant in 2013. He stated if Director DeJong does not have enough time for the year -end close that same person could help do some of the work. Councilmember Siakel asked if more support needs to be provided. She then asked if the new financial software that is being proposed is going to help staff with year -end closing. She went on to ask what Council needs to do to support accurate record keeping going forward. Director DeJong stated he now has a much better understanding of the current financial system then when he started with the City. He explained that prior to him coming to the City there were numerous things that were done different than the way he was used to doing them. Therefore, trying to understand the underlying mechanisms of the financial statements did not always make sense to him. Even though entries into the financial system appeared to be correct reports did not look quite right. When troubleshooting that they found more quirks with the financial software. Most of the quirks have been cleared up and he has a pretty good understanding of them. The proposed financial software will be set up in a way that he has operated in other cities. The new software would be a major improvement. It will allow staff to do things much easier and more logically. Mayor Zerby stated it's his understanding that the finding was not a result of a technical issue. It was an expertise issue. New software will not provide a solution for that. The solution was clarification from the auditor. He asked if staff can get that clarification earlier. Director DeJong explained in 2011 for the 2010 audit staff was behind schedule. The auditors did a lot of the work. The City did not have a finance director for part of 2010 during the time the audit was put together. He did not have all the spreadsheets or the background to put things together in 2012. He CITY OF SHOREWOOD WORK SESSION MEETING MINUTES June 24, 2013 Page 3 of 5 expressed his confidence that things could be put together in time for the 2013 audit without the assistance of outside help. Councilmember Woodruff asked Director DeJong if he intends to continue to have quarterly help from the consultant. DeJong stated he only used the consultant in the first quarter of 2013 and he no longer thinks that help is necessary. Woodruff stated he assumes that if staff determines it could use the help of the consultant it will make that happen. Mr. Berg stated that throughout the year if Council sees something on the financial report that looks unusual or that it does not understand he encouraged Council to ask Director DeJong for clarification. Councilmember Woodruff explained Council gets a monthly copy of sort of a profit and loss (P & L) report. Council does not get copies copy of a balance sheet on a regular basis. Based on seeing only the P & L he does not think Council would even know there was an issue. Mr. Berg stated a lot of time Council will not notice the technical stuff. Mr. Berg noted the financial statements and the financial decisions made are Council's responsibility. It's important that Council review the financial information and ask questions if it does not understand things. Councilmember Woodruff asked Mr. Berg if he recommends staff provide Council with balance sheets and cash flow statements, while noting he was not sure how many members of the Council could read them. Mr. Berg stated he has looked at the budget to actual report Council is provided, and he thought Council is provided with a cash balance report by fund. Woodruff clarified that there is no consistency with Council being provided with cash balance reports for the various funds. Councilmember Siakel concurred. Woodruff stated Council received a P & L report on a monthly basis with comparisons of actual to budget and of current year to previous year. Woodruff noted that he personally is not concerned about seeing depreciation. Mayor Zerby stated Council has to place confidence in staff that things are being done properly. He noted Council does have a fiduciary responsibility to make sure that is happening. He noted this is the third year in a row where there has been an audit fording. He stated to ask Council to be responsible for checking for errors seems like somewhat of a reach. Mr. Berg explained that during the audit the firm tests for seven areas of Minnesota legal compliance. As stated earlier the City complied will all of them. Mr. Berg provided a financial overview of the City's General Fund expenditures and revenues. He explained the City's General Fund balance was approximately $3.7 million at the end of 2008. It ranged between 66 percent and 68 percent over the last five years. At the end of 2012 the balance was approximately $3.62 million, which is an increase of approximately $136,000 when compared to the 2011 year -end balance of approximately $3.49 million. The 2012 year -end balance was 68 percent of the 2013 budgeted expenditures. The City's General Fund Balance Policy requires a fund balance of 55 — 60 percent of the next year's expenditures and transfers. Mr. Berg explained revenues exceeded budget by $210,000. Miscellaneous revenues were over by approximately $99,000, and licenses and permits revenue was over approximately $65,900. Expenditures were under budget by $53,676; expenditures exceeded revenues by $263,676 not including transfers. There was a budgeted transfer in of $40,000 which was not made. There were transfers out of $907,800. All of this together equates to the approximate $136,000 increase in the General Fund balance. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES June 24, 2013 Page 4 of 5 Mr. Berg displayed a graph comparing five sources of revenues (excluding property taxes which make up around 90 percent of the City's revenues) for 2008 — 2012. Mayor Zerby noted that other revenue was the largest source of revenue (again excluding property taxes). He asked if there needs to be more granularities for that category. Mr. Berg explained the City's reports do follow the state's chart of accounts. He then explained he thought the majority of the other revenue was from refunds and reimbursements. Also, cellular antenna rental is included in there for 2012. He reiterated that all sources of revenue with the exception of property taxes amount to about 10 percent of the General Fund revenue. Director DeJong reiterated there was a $40,000 transfer budgeted that was not made into the General Fund. DeJong explained that was previously done from an enterprise fund (the old Liquor Fund which was eventually transferred into the Community Infrastructure Fund). The cellular antenna revenue was coded into other revenue. Also, the category includes the reimbursements for inspection costs association with the Christmas Lake inspections. Mr. Berg displayed a graph comparing five sources of expenditures for 2008 — 2012. He explained the majority of the City's expenditures are in general government and public safety with them being 24.7 percent and 28 percent respectively of the total expenditures and transfers out. Mr. Berg then provided an overview of the other City funds. Mr. Berg stated the City has only one special revenue fund and it's called the Southshore Community Center Fund. At the end of 2012 it had a deficit fund balance of approximately $40,700. Revenues totaled approximately $62,000. Expenditures totaled approximately $123,000. And, there was a transfer in of $13,600. The firm recommends the City put a plan in place to eliminate the deficit. With regard to Debt Service Funds, Mr. Berg stated there were approximately $9.5 million in total bonded debt outstanding at the end of 2012 with the majority of it being for the Public Safety Facilities. There was $1.14 million on the 2008 Lease Revenue bonds for the renovation of City Hall outstanding at the end of 2012. He recommended the City continue to monitor to make sure the future cash flow will be sufficient to cover the bond liabilities. With regard to Capital Projects Funds, Mr. Berg stated there was a combined ending fund balance of approximately $4.5 million at the end of 2012. That is an increase of approximately $111,000 when compared to the 2012 year -end balance. The Street Reconstruction Fund had a year -end balance of approximately $1.76 million. There had been approximately $432,500 in expenditures and $700,000 of transfers in from other funds. The Community Infrastructure Fund had a year -end balance of approximately $1.84 million. The Equipment Replacement Fund had a year -end balance of approximately $614,000. It had approximately $227,700 in expenditures and $312,400 of transfers in from other funds. Mr. Berg highlighted the Enterprise Funds (water, sewer, recycling, and storm water management). He recommended the City monitor these enterprise operations to ensure rates are sufficient to cover operating expenses, debt service, and future capital needs for the enterprise operations. Water Fund revenues did cover expenses in 2012; it had not in 2011 and 2010. Each of the three years (2010 — 2012) included depreciation expense which is a noncash expense. That allowed the cash balance to increase the last three years. The 2012 year -end balance was approximately $4 million. The Sewer Fund has had operating losses the past three years. Operating expenses include depreciation (a noncash expense). The Fund had a year -end fund balance of approximate $3.5 million at the end of 2012. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES June 24, 2013 Page 5 of 5 The Recycling Fund is basically a break -even fund. In 2011 revenues were covering expenses. In 2012 they did not because of the timing of the receipt of grant revenue. The Stormwater Management Utility Fund balance was fairly significant in 2010 (approximately $666,000). Because of funding for projects that balance has decreased significantly. The 2012 balance was approximately $82,000. He strongly recommended scheduling out big capital projects and putting a plan in place to finance the projects. Mr. Berg noted he did not have time to review the ratio analysis. He encouraged Council to look through it. Mayor Zerby thanked Mr. Berg for his efforts and for coming this evening. 3. ADJOURN Woodruff moved, Siakel seconded, Adjourning the City Council Work Session of June 24, 2013, at 7:06 P.M. Motion passed 5101 RESPECTFULLY SUBMITTED, Christine Freeman, Recorder Sco erby, Ma or Ill VI *116, Jean Panchyshyn, City Clerk