2014 Management Report
Management Report
for
City of New Hope
Hennepin County, Minnesota
December 31, 2014
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To the City Council and Management
City of New Hope, Minnesota
We have prepared this management report in conjunction with our audit of the City of New Hope,
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 19, 2015
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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.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS
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 and Government Auditing Standards, 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.
PLANNED SCOPE AND TIMING OF THE AUDIT
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.
AUDIT OPINION AND FINDINGS
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 no findings based on our testing of the City’s compliance with Minnesota laws and
regulations.
SIGNIFICANT ACCOUNTING POLICIES
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. No
new accounting policies were adopted, and the application of existing policies was not changed during the
fiscal year ended December 31, 2014.
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.
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ACCOUNTING ESTIMATES AND MANAGEMENT JUDGMENTS
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:
Value of Land Held for Resale – These assets are stated at the lower of cost or net realizable
value based on management’s estimates.
Depreciation – Management’s estimates of depreciation expense are based on the estimated
useful lives of the assets.
Compensated Absences – Management’s estimate is based on current rates of pay; vacation,
wellness, personal, and sick leave balances; and the likelihood that accrued sick leave will
ultimately be paid at termination.
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.
We evaluated the key factors and assumptions used by management in the areas discussed above 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.
CORRECTED AND UNCORRECTED MISSTATEMENTS
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 taken as
a whole.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
DISAGREEMENTS WITH MANAGEMENT
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.
MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter dated May 19, 2015.
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MANAGEMENT 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.
OTHER AUDIT FINDINGS OR ISSUES
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.
OTHER MATTERS
We applied certain limited procedures to Management’s Discussion and Analysis and the Schedule of
Funding Progress for the Postemployment Benefits 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 financial statements and schedules
accompanying the financial statements which are not RSI. With respect to this supplementary
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 supplementary information 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 and statistical sections 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.
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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, 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.
PROPERTY TAXES
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 8.0 percent for taxes payable in 2013 and increased 0.9 percent
for taxes payable in 2014. The following graph shows the City’s changes in taxable market value over the
past 10 years:
$–
$300,000,000
$600,000,000
$900,000,000
$1,200,000,000
$1,500,000,000
$1,800,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Taxable Market Value
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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 for taxes payable in 2013
and was virtually unchanged (increasing 0.01 percent) for taxes payable in 2014.
The following graph shows the City’s change in tax capacities over the past 10 years:
$–
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Local Tax Capacity
The following table presents the average tax rates applied to city residents for each of the last two levy
years, along with comparative state-wide and metro area rates.
Rates expressed as a percentage of net tax capacity
2013 2014 2013 2014 2013 2014
Average tax rate
City 48.8 48.8 46.1 46.0 58.8 58.6
County 48.5 47.6 47.1 46.6 49.5 49.9
School 28.5 28.9 30.3 30.9 32.3 34.8
Special taxing 7.2 7.3 9.4 9.5 10.9 11.3
Total 133.0 132.6 132.9 133.0 151.5 154.6
State-Wide
All Cities
City of New HopeMetro Area
Seven-County
The City’s portion of the tax rate has been higher than average in recent years due to using annual levies
rather than special assessment bonds to finance street and park improvements.
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GOVERNMENTAL FUND BALANCES
The following table summarizes the changes in the fund balances of the City’s governmental funds during
the year ended December 31, 2014, presented both by fund balance classification and by fund:
Increase
2014 2013 Restated (Decrease)
Fund balances of governmental funds
Total by classification
Nonspendable 16,005$ 15,484$ 521$
Restricted 5,687,949 5,550,819 137,130
Committed 4,771,304 4,873,747 (102,443)
Assigned 7,839,792 8,204,338 (364,546)
Unassigned 5,670,497 5,567,933 102,564
Total – governmental funds 23,985,547$ 24,212,321$ (226,774)$
Total by fund
General 5,821,294$ 5,583,417$ 237,877$
Economic Development Authority Special Revenue 4,581,009 4,688,696 (107,687)
HRA Construction Capital Project 5,399,698 1,443,302 3,956,396
Street Infrastructure Capital Project 3,264,052 3,908,890 (644,838)
Temporary Financing Capital Project 3,028,957 3,130,125 (101,168)
HRA Bonds Debt Service (134,792) 3,815,654 (3,950,446)
Nonmajor funds 2,025,329 1,642,237 383,092
Total – governmental funds 23,985,547$ 24,212,321$ (226,774)$
as of December 31,
Governmental Funds Change in Fund Balance
Fund Balance
In total, the fund balances of the City’s governmental funds decreased by $226,774 during the year ended
December 31, 2014, excluding the effect of a prior period adjustment that increased beginning fund
balance by $362,674 in the Economic Development Authority Special Revenue Fund. The majority of the
decrease was in the assigned fund balances category, which was $364,546 lower than the previous year,
mainly due to the spend-down of fund balance assigned for street improvements in the Street
Infrastructure Capital Project Fund.
Restricted fund balances increased $137,130 in total. However, there were two significant offsetting
changes within that total. Fund balance restricted for economic development in the HRA Construction
Capital Project Fund increased $3,956,396 due to proceeds from the sale of the former Kmart site. Fund
balance restricted for debt service in the HRA Bonds Debt Service Fund declined $3,950,446 from the
prior year, as the proceeds of two refunding bond issues held in an escrow account since 2012 were used
to call $3,780,000 of outstanding tax increment bonds in a crossover refunding.
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GOVERNMENTAL FUNDS REVENUE AND EXPENDITURES
The following table presents the per capita revenue of the City’s governmental funds for the past three
years, along with state-wide averages.
We have included the most recent comparative state-wide averages available from the Office of the State
Auditor to provide a benchmark for interpreting the City’s data. The amounts received from the typical
major sources of governmental fund revenue will naturally vary between cities based on factors such as
the City’s stage of development, location, size and density of its population, property values, services it
provides, and other attributes. It will also differ from year-to-year due to the effect of inflation and
changes in the City’s operation. Also, certain data on these tables may be classified differently than how
they appear on the City’s financial statements in order to be more comparable to the state-wide
information, particularly in separating capital expenditures from current expenditures.
We have designed this section of our management report using per capita data in order to better identify
unique or unusual trends and activities of your city. We intend for this type of comparative and trend
information to complement, rather than duplicate, information in the Management’s Discussion and
Analysis. An inherent difficulty in presenting per capita information is the accuracy of the population
count, which for most years is based on estimates.
Year 2012 2013 2014
Population 2,500–10,000 10,000–20,000 20,000–100,000 20,764 20,904 20,904
Property taxes 422$ 388$ 423$ 443$ 456$ 465$
Tax increments 30 42 40 65 24 26
Franchise and other taxes 31 39 34 21 21 21
Special assessments 63 58 72 15 9 5
Licenses and permits 27 26 38 12 13 17
Intergovernmental revenues 253 268 148 41 214 39
Charges for services 109 84 91 75 76 80
Other 56 33 30 32 25 28
Total revenue 991$ 938$ 876$ 704$ 838$ 681$
Governmental Funds Revenue per Capita
With State-Wide Averages by Population Class
City of New Hope
December 31, 2013
State-Wide
In total, the City’s governmental fund revenues for 2014 were $14,223,258, a decrease of $3,288,553
(18.8 percent) from the prior year. On a per capita basis, the City received $681 in governmental fund
revenue for 2014, a decrease of $157 from the prior year. Property tax revenue was $9 per capita higher
than last year due to an increase of $147,162 in the City’s levy. Revenue from intergovernmental
revenues was $175 per capita lower than last year, returning to a more typical level for the City.
Intergovernmental revenue was unusually high in 2013 due to the City utilizing $4.1 million of municipal
state aid for street improvements.
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The expenditures of governmental funds will also vary from state-wide averages and from year-to-year,
based on the City’s circumstances. Expenditures are classified into three types as follows:
Current – These are typically the general operating type expenditures occurring on an annual
basis, and are primarily funded by general sources such as taxes and intergovernmental revenues.
Capital Outlay and Construction – These expenditures do not occur on a consistent basis, more
typically fluctuating significantly from year-to-year. Many of these expenditures are
project-oriented, and are often funded by specific sources that have benefited from the
expenditure, such as special assessment improvement projects.
Debt Service – Although the expenditures for debt service may be relatively consistent over the
term of the respective debt, the funding source is the important factor. Some debt may be repaid
through specific sources such as special assessments or redevelopment funding, while other debt
may be repaid with general property taxes.
The City’s expenditures per capita of its governmental funds for the past three years, together with
state-wide averages, are presented in the following table:
Year 2012 2013 2014
Population 2,500–10,000 10,000–20,000 20,000–100,000 20,764 20,904 20,904
Current
129$ 100$ 83$ 75$ 75$ 80$
244 235 239 286 285 306
123 121 91 57 60 59
83 99 85 77 77 84
66 73 91 15 28 14
645 628 589 510 525 543
Capital outlay
and construction 303 288 219 370 203 144
Debt service
164 133 102 16 16 17
55 43 39 18 15 10
219 176 141 34 31 27
Total expenditures 1,167$ 1,092$ 949$ 914$ 759$ 714$
Governmental Funds Expenditures per Capita
With State-Wide Averages by Population Class
City of New Hope
All other
December 31, 2013
State-Wide
Principal
Interest and fiscal
General government
Public safety
Public works
Culture and recreation
The City’s total governmental funds expenditures were $14,917,414 for 2014, a decrease of $958,626
(6.0 percent) from the prior year. On a per capita basis, the City’s governmental fund expenditures of
$714 represented a decrease of $45 from last year. Current expenditures for public safety were $21 per
capita higher than the previous year, mainly due to increased police personnel costs. Current expenditures
in the “all other” category above decreased $14 per capita, as Economic Development Authority Special
Revenue Fund development costs were unusually high in 2013. Capital outlay expenditures were $59 per
capita lower than the prior year, due to a decrease in street improvement projects.
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GENERAL FUND
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 five
years. We have also included a line representing annual expenditures and transfers out to reflect the
change in the size of the General Fund operation over the same period.
$–
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
$11,000,000
$12,000,000
2010 2011 2012 2013 2014
General Fund Financial Position
Year Ended December 31,
Fund Balance Cash Balance Expenditures and Transfers Out
The City’s General Fund cash and investment balance at December 31, 2014 was $5,763,629, an increase
of $257,683 from last year. The General Fund total fund balance at December 31, 2014 was $5,821,294,
which was an increase of $237,877 from the previous year, as compared to a budget that projected no
change in fund balance. Unassigned fund balance at year-end was $5,805,289, which represents
approximately 51.2 percent of annual expenditures and transfers out based on 2014 levels. By
comparison, unassigned fund balance at the end of the previous year represented 53.1 percent of
expenditures and transfers out.
As the graph illustrates, the City has generally been able to maintain healthy cash and fund balance levels
as the volume of financial activity has grown. This is an important factor because a government, like any
organization, requires a certain amount of equity to operate. 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 is a factor in determining
the City’s bond rating and resulting interest costs. Maintaining an adequate fund balance has become
increasingly important given the reductions in state funding for cities in recent years.
A trend that is typical to Minnesota local governments, especially the General Fund of cities, is the
unusual cash flow experienced throughout the year. The City’s General Fund cash disbursements are
made fairly evenly during the year other than the impact of seasonal services such as snowplowing, street
maintenance, and park activities. Cash receipts of the General Fund are quite a different story. Property
taxes comprise about 71 percent of the fund’s total annual revenue. Approximately half of these revenues
are received by the City in June/July and the rest in November/December. Consequently, the City needs
to have adequate cash reserves to finance its everyday operations between these payments.
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The following chart reflects the City’s General Fund revenue sources for 2014 compared to budget:
$– $1 $2 $3 $4 $5 $6 $7 $8 $9
Property Taxes
Franchise Taxes
Licenses and Permits
Intergovernmental
Charges for Services
Fines
Other
Millions
General Fund Revenue
Budget to Actual
Budget Actual
Total General Fund revenue for 2014 was $11,148,125, which was $108,233 (1.0 percent) higher than the
final budget. Intergovernmental revenue exceeded budget by $88,252, mainly in state aid for police
insurance, highway maintenance, and other miscellaneous grants. Charges for services were over budget
by $133,774, mainly due to higher than anticipated charges for building plan reviews, rental housing
inspections, police services and false alarms, and recreation programs. Revenue from fines and
forfeitures, which can vary from year-to-year, was below budget by $152,915.
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.
$–
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
Property Taxes Intergovernmental Other
General Fund Revenue by Source
Year Ended December 31,
2010 2011 2012 2013 2014
Total General Fund revenue for 2014 was $429,767 (4.0 percent) higher than the prior year. Property tax
revenue was $124,975 higher than the prior year due to a levy increase. Intergovernmental revenue
increased $169,822 due to the City receiving more local government aid (LGA), police insurance aid, and
other miscellaneous state grants than the previous year. Revenues from other sources were $134,970
higher than the prior year, with most of the increase in revenues from building permits and charges for
services.
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The following graphs illustrate the components of General Fund spending for 2014 compared to budget:
$– $1 $2 $3 $4 $5 $6 $7
General Government
Public Safety
Public Works
Culture and Recreation
Millions
General Fund Expenditures
Budget to Actual
Budget Actual
Total General Fund expenditures for 2014 were $11,079,709, which was $379,183 (3.3 percent) under
budget. Expenditures were under budget across all of the categories shown above. Public safety
expenditures were $209,102 under budget, primarily in police and protective inspection salaries. Culture
and recreation expenditures were under budget by $76,384, mainly in parks department salaries and
swimming pool costs.
The following graph illustrates the City’s General Fund expenditures by function over the last five years:
$–
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
General Government Public Safety Public Works Culture and Recreation
General Fund Expenditures by Function
Year Ended December 31,
2010 2011 2012 2013 2014
Total General Fund expenditures increased by $773,355 (7.5 percent) from the previous year. The
majority of the increase, $590,187, was in public safety. The increase in public safety was primarily in
police salaries and purchased services. Culture and recreation expenditures were $143,217 higher than
last year, mainly in recreation program salaries, supplies, and promotion.
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ENTERPRISE FUNDS OVERVIEW
The City maintains several enterprise funds to account for services the City provides that are financed
primarily through fees charged to those utilizing the service. This section of the report provides you with
an overview of the financial trends and activities of the City’s enterprise funds, which includes the Sewer
Utility, Water Utility, Golf Course, Ice Arena, Storm Water, and Street Lighting funds.
ENTERPRISE FUNDS FINANCIAL POSITION
The following table summarizes the changes in the financial position of the City’s enterprise funds during
the year ended December 31, 2014, presented both by classification and by fund:
Increase
2014 2013 (Decrease)
Net position of enterprise funds
Total by classification
Net investment in capital assets 14,757,333$ 14,142,276$ 615,057$
Restricted 455,000 300,000 155,000
Unrestricted 2,836,331 3,397,270 (560,939)
Total – enterprise funds 18,048,664$ 17,839,546$ 209,118$
Total by fund
Sewer Utility 2,813,122$ 2,381,281$ 431,841$
Water Utility 5,525,993 6,118,043 (592,050)
Golf Course 671,026 714,395 (43,369)
Ice Arena 3,730,181 3,751,274 (21,093)
Storm Water 5,072,359 4,664,922 407,437
Street Lighting 235,983 209,631 26,352
Total – enterprise funds 18,048,664$ 17,839,546$ 209,118$
Enterprise Funds Change in Financial Position
Net Position
as of December 31,
The total net position of the City’s enterprise funds increased by $209,118 during the year ended
December 31, 2014. The net investment in enterprise capital assets increased $615,057, primarily due to
the amount of internally financed capital asset additions purchased or constructed during the year. The
$455,000 restricted net position represents cash held in an escrow account in the Ice Arena Fund for the
future payment of the City’s energy conservation lease revenue bonds. Unrestricted net position declined
by $560,939, mainly due to current year operating results in the Water Utility Fund, which included a
payment of $1.2 million to the Golden Valley – Crystal – New Hope Joint Water Commission (JWC) for
the City’s share of an emergency well project.
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SEWER UTILITY FUND
The following graph presents five years of operating results for the City’s Sewer Utility Fund.
$–
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
2010 2011 2012 2013 2014
Sewer Utility Operating Results
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Sewer Utility Fund ended 2014 with a total net position of $2,813,122, of which $2,679,973
represents the net investment in sewer collection system capital assets, and $133,149 is unrestricted. Net
position increased in the current year by $431,841.
Operating revenue in the Sewer Utility Fund for 2014 was $2,414,482, a decrease of $28,612
(1.2 percent) from the previous year.
Operating costs for 2014 were $1,936,608, a decrease of $342,547 (15.0 percent) from the prior year,
mainly due to decreases in system repair and maintenance costs.
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WATER UTILITY FUND
The following graph presents five years of operating results for the City’s Water Utility Fund.
$(1,500,000)
$(1,000,000)
$(500,000)
$–
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
2010 2011 2012 2013 2014
Water Utility Operating Results
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Water Utility Fund ended 2014 with a total net position of $5,525,993, of which $4,248,578
represents the net investment in water distribution system capital assets, and $1,277,415 is unrestricted.
Water Utility Fund net position decreased $592,050 in 2014.
Operating revenue in the Water Utility Fund for 2014 was $3,572,291, an increase of $112,283
(3.2 percent) from the prior year. Rate increases of approximately 5 percent were partially offset by a
decrease in consumption, mainly due to less summer irrigation usage.
Operating costs for 2014 were $4,554,088, an increase of $1,414,750 (45.1 percent) from the prior year.
The majority of this increase was due to the payment of $1.2 million to the Golden Valley – Crystal –
New Hope Joint Water Commission for the City’s share of an emergency well project.
A 2014 operating loss of $981,797 was partially offset by net nonoperating revenues of $425,078, which
included $358,783 of LGA allocated to this fund.
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GOLF COURSE FUND
The following graph presents five years of operating results for the City’s Golf Course Fund:
$(100,000)
$(50,000)
$–
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
2010 2011 2012 2013 2014
Golf Course Fund
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Golf Course Fund ended 2014 with a total net position of $671,026, a decrease of $43,369 from the
prior year. Of this, $612,585 represents the net investment in golf course capital assets, leaving $58,441 in
unrestricted net position.
Golf Course Fund operating revenue for 2014 was $243,497, a decrease of $15,724 (6.1 percent), which
is attributable to a decrease in the number of rounds played due to unfavorable weather.
Operating expenses were $298,222, which was $38,527 (14.8 percent) higher than prior year, mainly due
to increased small equipment costs and central garage charges.
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ICE ARENA FUND
The following graph presents five years of operating results for the City’s Ice Arena Fund:
$(200,000)
$–
$200,000
$400,000
$600,000
$800,000
$1,000,000
2010 2011 2012 2013 2014
Ice Arena Fund
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Ice Arena Fund ended 2014 with a total net position of $3,730,181, a decrease of $21,093 from the
prior year. Of this, $3,146,953 represents the net investment in arena capital assets, $455,000 is restricted
for debt service, and $128,228 is unrestricted.
Ice Arena Fund operating revenue for 2014 was $775,784, an increase of $50,573 (7.0 percent) from the
prior year, mainly due to more revenue from ice time rental to area hockey associations and school
districts than last year.
Operating expenses were $809,598, which was $90,099 (10.0 percent) lower than the prior year due to a
decrease in facility maintenance costs.
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STORM WATER FUND
The following graph presents five years of operating results for the City’s Storm Water Fund:
$–
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
2010 2011 2012 2013 2014
Storm Water Fund
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Storm Water Fund ended 2014 with a total net position of $5,072,359, an increase of $407,437 from
the prior year. Of this, $4,069,244 represents the net investment in storm water collection system capital
assets, leaving $1,003,115 in unrestricted net position.
Storm Water Fund operating revenues for 2014 were $948,537, a decrease of $14,630 (1.5 percent) from
the previous year.
Operating expenses were $517,585, a decrease of $214,150 (29.3 percent), as system repair costs returned
to a more typical level.
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STREET LIGHTING FUND
The following graph presents five years of operating results for the City’s Street Lighting Fund:
$–
$15,000
$30,000
$45,000
$60,000
$75,000
$90,000
$105,000
$120,000
$135,000
2010 2011 2012 2013 2014
Street Lighting Fund
Year Ended December 31,
Operating Revenue
Operating Expenses
Operating Income (Loss)
The Street Lighting Fund ended 2014 with an unrestricted net position of $235,983, an increase of
$26,352 from the prior year.
Street Lighting Fund operating revenues for 2014 were $123,060, a decrease of $2,544 (2.0 percent) from
the previous year.
Operating expenses were $99,506, which was $18,012 (15.3 percent) lower than the previous year due
primarily to a decrease in electric utility costs.
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GOVERNMENT-WIDE FINANCIAL STATEMENTS
In addition to fund-based information, the current reporting model for governmental entities also requires
the inclusion of two government-wide financial statements designed to present a clear picture of the City
as a single, unified entity. These government-wide financial statements provide information on the total
cost of delivering services, including capital assets and long-term liabilities.
STATEMENT OF NET POSITION
The Statement of Net Position essentially tells you what your city owns and owes at a given point in time,
the last day of the fiscal year. Theoretically, net position represents the resources the City has leftover to
use for providing services after its debts are settled. However, those resources are not always in spendable
form, or there may be restrictions on how some of those resources can be used. Therefore, net position is
divided into three components: net investment in capital assets, restricted, and unrestricted.
The following table presents the components of the City’s net position as of December 31, 2014 and 2013
for governmental activities and business-type activities:
Increase
2014 2013 (Decrease)
Net position
Governmental activities
Net investment in capital assets 26,305,906$ 30,509,373$ (4,203,467)$
Restricted 5,680,117 1,619,394 4,060,723
Unrestricted 23,130,558 23,704,592 (574,034)
Total governmental activities 55,116,581 55,833,359 (716,778)
Business-type activities
Net investment in capital assets 14,757,333 14,142,276 615,057
Restricted 455,000 300,000 155,000
Unrestricted 1,798,707 2,496,008 (697,301)
Total business-type activities 17,011,040 16,938,284 72,756
Total net position 72,127,621$ 72,771,643$ (644,022)$
As of December 31,
The City’s total net position at December 31, 2014 was $644,022 lower than at the beginning of the year.
Governmental activities net position decreased $716,778 in total. The decrease in governmental activities
net investment in capital assets and increase in restricted net position were both due to the sale of a parcel
of land valued at over $5 million to a developer. The decrease in unrestricted net position is primarily the
result of spending down resources assigned for street improvements during the year.
Business-type activities net position increased $72,756, as outlined in the discussion of enterprise fund
operations earlier in this report.
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STATEMENT OF ACTIVITIES
The Statement of Activities tracks the City’s yearly revenues and expenses, as well as any other
transactions that increase or reduce total net position. These amounts represent the full cost of providing
services. The Statement of Activities provides a more comprehensive measure than just the amount of
cash that changed hands, as reflected in the fund-based financial statements. This statement includes the
cost of supplies used, depreciation of long-lived capital assets, and other accrual-based expenses.
The following table presents the change in net position of the City for the years ended December 31, 2014
and 2013:
2013
Program
Expenses Revenues Net Change Net Change
Governmental activities
General government 1,976,377$ 662,902$ (1,313,475)$ (1,316,937)$
Public safety 6,795,836 1,310,198 (5,485,638) (5,105,440)
Public works 2,467,618 430,970 (2,036,648) 2,531,055
Culture and recreation 2,145,224 648,565 (1,496,659) (1,248,021)
Economic development 1,704,010 132,750 (1,571,260) (369,598)
Interest on long-term debt 140,321 – (140,321) (289,009)
Business-type activities
Sewer utility 1,976,864 2,414,482 437,618 132,598
Water utility 4,635,686 4,022,007 (613,679) 280,253
Golf course 304,059 254,508 (49,551) 7,010
Ice arena 877,826 844,603 (33,223) 49,401
Storm water 558,160 948,537 390,377 406,673
Street lighting 99,560 123,060 23,500 8,086
Total net (expense) revenue 23,681,541$ 11,792,582$ (11,888,959) (4,913,929)
General revenues
Property taxes and tax increments 10,270,647 10,066,553
Franchise taxes 438,541 438,834
Unrestricted grants and contributions 179,537 49,005
Unrestricted investment earnings 356,212 206,166
Gain on disposal of assets – 37,201
Total general revenues 11,244,937 10,797,759
Change in net position (644,022)$ 5,883,830$
2014
Net (expense) revenue
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. It also
shows that, for the most part, 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.
The $6.5 million decrease in the total change in net position from 2013 to 2014 was mainly the result of
two factors; the $4.1 million of capital grants the City received in 2013 for street improvements in the
Public Works Program area, and the $1.2 million paid from the Water Utility Fund in 2014 to the JWC
for an emergency well project.
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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.
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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.
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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.
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ACCOUNTING AND AUDITING UPDATES
GASB STATEMENT NO. 68 – ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS—AN
AMENDMENT OF GASB STATEMENT NOS. 27 AND 50
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.
GASB STATEMENT NO. 72 – FAIR VALUE MEASURE AND APPLICATION
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.
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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.
CHANGES TO REQUIREMENTS FOR FEDERAL GRANTS
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.
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COSO INTERNAL CONTROL FRAMEWORK
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.
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