2004 - Abdo Eick & Meyers LLP
Certified ?uhlic Accountants & Consultants
Apri114,2005
Grandview Square
5201 Eden Avenue
Suite 370
Edina, MN 55436
Honorable Mayor and Council
City of Shorewood
Shorewood, Minnesota
We have audited the fInancial statements of the City of Shore wood, Minnesota (the City) for the year ended December 31,2004
and have issued our report thereon dated April 14, 2005. Professional standards require that we provide you with the following
information related to our audit.
Our Responsibility Under Auditing Standards Generally Accepted in the United States of America
As stated in our engagement letter, our responsibility, as described by professional standards, is to plan and perform our audit to
obtain reasonable, but not absolute, assurance that the fmancial statements are free of material misstatement and are fairly
presented in accordance with accounting principles generally accepted in the United States of America. 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 errors, fraud or illegal acts may exist and not be detected by us.
In planning and performing our audit of the fmancial statements of the City, for the year ended December 31, 2004, we considered
its internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the fmancial
statements and not to provide assurance on the internal control. However, we noted certain matters involving the internal control
and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified
Public Accountants. Reportable conditions involve matters coming to our attention relating to signifIcant deficiencies in the
design or operation of internal control that, in our judgment, could adversely affect the City's ability to record, process, summarize
and report fmancial data consistent with the assertions of management in the fmancial statements. We noted the following
reportable condition:
Segregation of Duties
Our study and evaluation disclosed that because of the limited size of your office staff, the City has limited segregation of
duties. Good internal control contemplates an adequate segregation of duties so that no one individual handles a transaction
from inception to completion. While we recognize that the City is not large enough to permit an adequate segregation of
duties in all respects, it is important, however, that you be aware of this condition.
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 errors or fraud in amounts that would be material in relation to the fmancial
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 internal control would not necessarily disclose all matters in internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material
weaknesses as defmed above. However, the reportable condition described above is not believed to be a material weakness.
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City of Shorewood
April 14, 2005
Page Two
As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed
tests of compliance with certain provisions oflaws, regulations, contracts and grants. However, the objective of our tests was not
to provide an opinion on compliance with such provisions. We noted no instances of non-compliance with Minnesota statutes.
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of our
engagement letter, we will advise management about the appropriateness of accounting policies and their application. The
significant accounting policies used by the City are described in Note 1 to the financial statements. As described in Note 8 to the
[mancial statements, the City implemented several new accounting pronouncements issued by the Government Accounting
Standards Board (GASB). They are statement No. 34, "Basic Financial Statements - and Management's Discussion and Analysis
- for State and Local Government", Statement No. 37, "Basic Financial Statements - and Management's Discussion and Analysis
- for State and Local Governments: Omnibus", and Statement No. 38, "Certain Financial Statement Note Disclosures",
paragraphs 6 through 11 for 2004. Accordingly, the cumulative effect of the accounting change as of the beginning of the year is
reported in the 2004 [mancial statements. We noted no transactions entered into by the City 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 combined [mancial 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 [mancial statements and because of the possibility that
future events affecting them may differ significantly from those expected. The most significant estimate affecting the financial
statements was depreciation on capital assets and the historical cost of some capital assets.
Management's estimate of depreciation is based on estimated useful lives of the assets. We evaluated the key factors and
assumptions used to develop this estimate in determining that it is reasonable in relation to the [mancial statements taken as a
whole. The estimate of historical cost was based on deflated current value.
Audit Adjustments
For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the combined [mancial
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's [mancial reporting process (that is, cause future [mancial
statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by
the City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's [mancial
reporting process. We noted no uncorrected misstatements.
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 [mancial statements
or the auditor's report. Weare pleased to report that no such disagreements arose during the course of our audit.
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City of Shorewood
April 14, 2005
Page Three
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 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.
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'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 difficulties in dealing with management in performing our audit.
Other Matters
The following are areas that came to our attention during the audit that we feel should be reviewed:
GASB Statement No. 34
As mentioned previously, the City has implemented GASB Statement No. 34 for the December 31,2004 [mancial statements.
The main change resulting from the implementation was issuing [mancial statements under a new reporting model. The main
features of this model are summarized below:
· Narrative analysis through the Management Discussion and Analysis (MD&A) letter.
. Government-wide [mancial reporting that builds upon traditional fund based [mancial statements. The government-
wide [mancial statements are intended to give a more concise view of the City as a single unifIed entity.
. More long-term focus for governmental activities. The City now has fIxed assets, bonds and compensated absences
payable on its Statement of Net Assets for Governmental Activities. The addition of this information should help
direct users to a long-term view of the [mancial data.
· A distinction between major and non-major funds. More information is provided on individual funds that meet the
criteria to be included as major funds. The General, Debt Service, MSA Construction and EDA Public Safety
Facilities Project are considered major governmental funds.
. Budgeting analysis that considers both the adopted and [mal budget.
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City of Shorewood
April 14, 2005
Page Four
Financial Position and Results of Operations
General Fund
The General fund is used to account for resources traditionally associated with government, which are not required legally or
by sound principal management to be accounted for in another fund. The General fund balance increased $394,751 from
2003. Overall, the unreserved fund balance of$2,94l,223 is 67 percent of the 2005 budgeted expenditures. We recommend
the fund balance be maintained at a level sufficient to fund operations until the major revenue sources are received in June.
We feel a reserve of approximately 40 to 50 percent of planned expenditures and transfers out is adequate to meet working
capital and small emergency needs. At the current level, the fund balance is above the range of what is generally
recommended as a minimum.
The Minnesota Office of the State Auditor has classified cities' unreserved fund balance levels relative to expenditures as
follows:
Extremely low
Low
Acceptable
Moderately high
High
Very high
Extremely high
Under 20%
21 - 34
35 - 50
51 - 64
65 - 100
101 - 150
Above 150
The State Auditor does group all general and special revenue funds of the City when making this calculation where our
calculation is based only on the General fund. Although there is no legislation regulating fund balance, it is a good policy to
designate intended use of fund balance. This helps address citizen concerns as to the use of fund balance and tax levels.
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City of Shorewood
Apri114,2005
Page Five
A table surrnnarizing the General fund balance in relation to budget follows:
Percent
General of Fund
Fund Balance Budget Fund Balance to
Year December 31 Year Budget Budget
2000 $ 1,749,180 2001 $ 3,127,790 56 %
2001 1,905,309 2002 3,719,072 58
2002 2,112,985 2003 3,719,072 57
2003 2,546,472 2004 3,921,974 65
2004 2,941,223 2005 4,371,021 67
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April 14, 2005
Page Six
The purposes and benefits of a General fund balance are as follows:
Purposes and Benefits
. Expenditures are incurred somewhat evenly throughout the year. However, property tax and state aid revenues are not
received until the second half of the year. An adequate fund balance will provide the cash flow required to finance the
General fund expenditures.
. The City is vulnerable to legislative actions at the State and Federal level. The State eliminated HACA aid with the 2001
legislative session and imposed reductions of market value credit aid and local government aid for some cities. Levy
limits have also been implemented for municipalities in past legislative sessions. An adequate fund balance will provide
a temporary buffer against those aid adjustments and levy limits.
. Expenditures not anticipated at the time the annual budget was adopted may need immediate council action. These
would include capital outlay replacement, lawsuits and other items. An adequate fund balance will provide the fmancing
needed for such expenditures.
. A strong fund balance will assist the City in maintaining, improving or obtaining a bond rating.
The 2004 operations are summarized as follows:
Variance with
Final Budget -
Final Positive
Budget Actual (Negative)
$ 3,891,947 $ 3,957,248 $ 65,301
3,598,447 3,268,997 329,450
293,500 688,251 394,751
30,000 30,000
(323,500) (323,500)
$ 394,751 $ 394,751
2,546,472
$ 2,941,223
It was $118,088 more than budgeted. This variance
Revenues
Expenditures
Excess (deficiency) of revenues
over (under) expenditures
Other financing sources (uses)
Transfer in
Transfer out
Net change in fund balances
Fund balances, January 1, 2004
Fund balances, December 31,2004
. The largest item of variance in revenues was in licenses and permits.
resulted from greater building permit revenue than expected.
. The four largest items of variance in expenditures were in general government Mayor and Council, general government
professional services, general government capital outlay, and pubic works streets and highways. These departments were
under budget by $43,291, $47,939, $46,822 and $38,502, respectively.
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City of Shorewood
April 14, 2005
Page Seven
A comparison between 2004 and 2003 revenues and transfer in are presented below:
Percent Increase
of (Decrease)
Source 2004 Total 2003 From 2003
Property taxes $ 3,344,442 83.8 % $ 3,071,853 $ 272,589
Licenses and permits 310,055 7.8 334,424 (24,369)
Intergovernmental 73,065 1.8 65,782 7,283
Charges for services 44,169 1.1 48,689 (4,520)
Fines and forfeitures 81,841 2.1 88,949 (7,108)
Interest on investments 58,564 1.5 55,649 2,915
Miscellaneous 45,112 1.1 33,700 11,412
Transfers in 30,000 0.8 33,000 (3,000)
Total revenues and transfers in $ 3,987,248 100.0 % $ 3,732,046 $ 255,202
A graphical presentation of2004 revenues and transfer in totals by source follows:
2004 Revenues
Property taxes
83.8%
Transfers in
0.8%
Licenses and permits
7.8%
Miscellaneous
1.1%
Interest on investments
1.5%
Fines and forfeitures
2.1%
Intergovernmental
1.8%
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City of Shorewood
April 14, 2005
Page Eight
A comparison between 2004 and 2003 expenditures and transfers out are presented below:
Percent Increase
of (Decrease)
Program 2004 Total 2003 From 2003
General government $ 1,037,043 28.9 % $ 1,038,909 $ (1,866)
Public safety 1,028,689 28.6 999,049 29,640
Public works 477,596 13.3 420,608 56,988
Culture and recreation 168,278 4.7 164,540 3,738
Capital outlay 519,847 14.5 314,902 204,945
Debt service 37,544 1.0 37,544
Transfers out 323,500 9.0 365,000 (41,500)
Total expenditures and transfers out $ 3,592,497 100.0 % $ 3,340,552 $ 163,445
A graphical presentation of 2004 expenditures and transfers out totals by program follows:
2004 Expenditures
General government
28.9%
Transfers out
9.0%
Public safety
28.6%
Debt service
1.0%
Capital outlay
14.5%
Culture and recreation
4.7%
Public works
13.3%
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City of Shorewood
April 14, 2005
Page Nine
Debt Service Funds
Debt Service funds are used to account for debt not accounted for in proprietary funds. The following summarizes the assets
of each Debt Service fund with the bonds payable at year end.
Total Bonds
Assets Outstanding
$ 111,155 $
10,345
12,454,655 12,365,000
$ 12,576,155 $ 12,365,000
Final
Maturity
Date
Debt Description
Cash and
Investments
1993 Improvement and refunding
Waterford III Tax Increment
2002/2003 Public Safety Building
$
100,902
10,287
79,655
2023
Total G.O. Bonds
$
190,844
The 1993 Improvement and Refunding bonds are paid in full and the remaining resources can be used for whatever the
Council deems appropriate. We recommend the Council approve a transfer of remaining funds in 2005 to close the fund.
The remaining funds in the Waterford III Tax Increment fund should be used for a purpose consistent with the tax increment
fmancing plan.
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Capital Projects Funds
City of Shorewood
April 14, 2005
Page Ten
Capital projects funds account for the acquisition of fixed assets or construction of major capital projects not being fmanced
by proprietary funds. A summary of year end fund balances for all capital projects funds follows:
Land and Open Space
Public Facilities/Office Equipment
Park Capital Improvement
Equipment Replacement
Street Reconstruction
MSA construction
Senior Community Center
EDA Public Safety Facilities Project
Capital Projects Fund Balances
5-
5105,193
5147,611
5321,638
5311,525
5654,549
.A
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All funds have positive fund balances with many of the funds having significant resources built up for future projects. The
large decrease in fund balance in the EDA Public Safety Facilities Project fund was due to payment for the construction of the
new public safety building.
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April 14, 2005
Page Eleven
Enterprise Funds
Liquor Fund
The results of the operations and cash position of Water ford Center for the past four years are as follows:
Waterford Center Liquor Fund Summary
$1,000,000
$800,000
I------
$600,000
-
f---
$400,000
-
$200,000
-
27.4%
~'"
.,,,,, J:
-
~=~].
",*",,,,,,,,,,,*,, """",*""""""""",'.',,,,,,,, ,,'
27.3%
........~......[.
26.9%
='10*
CJ"
,,',',',',',",',',',',',',',',',',',',',',',',',',',"".
""""""-
c---
26.7%
"'~ I------
$(200,000)
-e-;"""""
"""".""'"
"",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,".",,,,,,,,,,,,,,,,,,,,,,,""""""""""",,,,,,,,,,,,,,,,,,,.
$-
$(400,000)
2001
$774,745
$212,373
$10,815
$(196,276)
2002
$792,379
$216,621
$11,164
$(167,065)
2003
$841,432
$226,292
$12,153
$(166,963)
2004
$857,591
$228,805
$1,737
$(162,426)
""""',*
"","""'.'
"",,,,,,'.'
I Sales
''''''''''Gross profit
"""'Operating income (loss)
''''''''Cash balance
While the gross profit has been good for the past several years, the operating income has remained near breakeven and
this limits positive cash flow. Eventually, the cash deficit needs to be eliminated and management needs to implement
and monitor a plan to achieve it. One option would be to transfer the available cash balance from the former Tonka Bay
store which is sufficient to eliminate the deficit.
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City of Shorewood
April 14, 2005
Page Twelve
The results of the operations and cash position of Shorewood Plaza for the past four years are as follows:
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
I Sales
""""",,,',,*;;,,, ";;;; Gross profit
"",,,,,,,,,., "",;;,,, Operating income (loss)
,;;,,,;;;;,".' ;;";;'" Cash balance
Shorewood Plaza Liquor Fund Summary
25.2% 27.6% 26.2% 26.8%
,- ;:;:;:!:;:
2001 2002 2003 2004
$1,086,613 $986,875 $931,316 $1,338,006
$273,539 $272,529 $243,555 $358,033
$57,139 $71,932 $10,812 $47,014
$336,270 $382,327 $227,993 $328,983
Gross profit has remained above statewide averages, with the percentage increasing slightly from 2003. Sales increased
44 percent, resulting in the highest sales in the last four years.
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April14,2005
Page Thirteen
Water Fund
The results of the operations and cash position of the Water fund for the past three years are as follows:
. Operating revenues. Operating expenses. Operating income (loss) 0 Cash and cash equivalents
The increase in operating revenue was due to increased water fees. Operating income decreased due to operating
expenditures increasing more than operating revenue. Cash increased from 2003 and is sufficient to meeting ongoing
operating and debt service expenses. The total amount of bonds outstanding at year end is $2,170,000.
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April 14, 2005
Page Fourteen
Sewer Fund
The results of the operations and cash position of the Sewer fund for the past three years are as follows:
I_ Operating revenues - Operating expenses _ Operating income 0 Cash and cash equivalents I
The Sewer fund has good margins and cash balances. The net operating margins have continued to provide adequate
cash flows for operation.
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Apri114,2005
Page Fifteen
Recycling Fund
The results of the operations and cash position of the Recycling fund for the past three years are as follows:
Percent Percent Percent
2004 of Total 2003 of Total 2002 of Total
Charges for service $ 93,403 100 % $ 98,194 100 % $ 81,860 100 %
Operating expenses 106,933 114 116,561 119 104,708 128
Operating income (loss) (13,530) (14) (18,367) (19) (22,848) (28)
Nonoperating revenues (expense~ 22,442 24 22,468 23 26,521 32
Change in net assets $ 8,912 10 % $ 4,101 4 % $ 3,673 4 %
Cash and cash equivalents $ 51,760 $ 43,763 $ 41,457
Recycling Fund
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
$(20,000)
$(40,000)
2002 2003 2004
I_ Charges for service - Operating expenses _ Operating income (loss) 0 Cash and cash equivalents I
The nonoperating revenue is the county recycling Grant. This fund has had increases in cash for the last three years.
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April14,2005
Page Sixteen
Stormwater Management Utility Fund
The results of the operations and cash position of the Stormwater Management Utility fund for the past three years are as
follows:
Percent Percent Percent
2004 of Total 2003 of Total 2002 of Total
Charges for service $ 63,826 100 % $ 57,201 100 % $ 43,985 100 %
Operating expenses 99,360 156 55,147 96 18,161 41
Operating income (loss) (35,534) (56) 2,054 4 25,824 59
Nonoperating revenues (expense 20,446 32 15,033 26 52,718 120
Income before transfers (15,088) (24) 17,087 30 78,542 179
Transfers in 25,000 39 30,000 52 35,000 80
Change in net assets $ 9,912 16 % $ 47,087 82 % $ 113,542 258 %
Cash and cash equivalents $ 292,084 $ 275,017 $ 173,094
Stormwater Management Utility Fund
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$-
$(50,000)
$(100,000)
2002 2003 2004
I_ Charges for service _ Operating expenses _ Operating income (loss) 0 Cash and cash equivalents I
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City of Shorewood
April 14, 2005
Page Seventeen
* * * * *
This report is intended solely for the information and use of management, Council and the Minnesota Office of the State Auditor
and is not intended to be and should not be used by anyone other than these specified parties.
Our audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of the accounting
records and related data. The comments and recommendations in the report are purely constructive in nature, and should be read
in this context.
If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your
convenience. We wish to thank you for the opportunity to be of service and for the courtesy and cooperation extended to us by
your staff.
(J1bM ~~JlLf
Apri114,2005
Minneapolis, Minnesota
ABDO, EICK & MEYERS, LLP
Certified Public Accountants
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