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VII.2. 2018 Audit and Comprehensive Annual Financial Report; Bishop
CITY OF HOPKINS Memorandum To: Honorable Mayor and Council Members Mike Mornson, City Manager From: Nick Bishop, Finance Director Date: July 16, 2018 Subject: 2018 Audit and Comprehensive Annual Financial Report (CAFR) _____________________________________________________________________ PURPOSE Informational INFORMATION Our auditors; Dennis Hoogeveen, Principal, John Lorenzini, Manager and Lance Lauinger, Senior Associate; of the audit firm CliftonLarsonAllen, LLP will be in attendance to present the results of their audit. A copy of their presentation and Executive Audit Summary are attached. Due to its size, the CAFR will be provided by email. It is also available on the City’s website: http://www.hopkinsmn.com/Archive.aspx?AMID=36 FUTURE ACTION N/A Finance Department WEALTH ADVISORY | OUTSOURCING | AUDIT, TAX, AND CONSULTING Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor ©2019 CliftonLarsonAllen LLPCity of Hopkins, Minnesota Audit Presentation -Council - Year Ending December 31, 2018 Meeting Date Tuesday, July 16, 2019 ©2019 CliftonLarsonAllen LLPCreate Opportunities Audit Team Your audit team consisted of the following professionals with extensive experience in governmental accounting and auditing: –Dennis Hoogeveen –Principal (30 years) –John Lorenzini –Manager (11 years) –Lance Lauinger –Senior Associate (3 years) –Jack Stearns, Emma Casey, Cristobal Estrada (Associates) 2 ©2019 CliftonLarsonAllen LLPCreate Opportunities Audit Results •Audit Opinion: –The City has an unmodified (clean) opinion for the December 31, 2018 financial statement audit. •Internal Controls over Financial Reporting: –Material Weakness –Audit Adjustment –Significant Deficiencies –Disbursement Approvals •Minnesota Legal Compliance: –No legal compliance findings 3 ©2019 CliftonLarsonAllen LLPCreate Opportunities Required Communications •New Accounting Policies: –GASB 75 –OPEB –GASB 89 –Construction Interest •Accounting Estimates •Difficulties performing the audit (None) •Uncorrected misstatements (“passed adjustments”) –Timing of State Fire Relief Aid •Corrected misstatements (“audit adjustments”) –Timing of grant revenue recognition adjustment •Disagreements with management (None) 4 ©2019 CliftonLarsonAllen LLPCreate Opportunities Financial Results •Governmental Funds fund balances totaled $19.8 million, a decrease of $4.5M from 2017 –Economic Development –(Grant timing) –PIR –(Street improvements AND Blake Road projects) –Pavilion Addition (capital outlay) •General Fund Revenues were $57K or 0.4% higher than budget •General Fund Expenditures were $291K or 2.17% higher than budget •Unassigned fund balance of the General Fund totaled $5.2M –38% of annual expenditures, or 4 ½ months –State Auditor -35%-50%, or 5 months –City Policy –42%, or 5 months 5 ©2019 CliftonLarsonAllen LLPCreate Opportunities City Presentation Financial Results –Gen Fund Revs by Source 6 •78% -Taxes •5% -Licenses and Permits •10% -Inter- governmental •3% -Charges for Services •4% -Other Revenues79%79%79%78%77%78% 6%5%4%6%6%5% 7%8%9% 9% 8%10% 3%3%2% 3% 3%3% 5%5%5% 5% 5%4% $- $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 $13,000,000 $14,000,000 $15,000,000 2013 2014 2015 2016 2017 2018 Taxes Licenses and Permits Intergovernmental Charges for Services Other Revenues ©2019 CliftonLarsonAllen LLPCreate Opportunities City PresentationFinancial Results –Gen Fund Exp by Dept. 7 •18% -General Government •54% -Public Safety •1% -Health and Welfare •21% -Highways and streets •1% -Urban Redevelopment and Housing •5% -Culture and Recreation16%16%18%18%18%18% 55%54%54%53%53%54% 2%2%2% 1% 1% 1% 21%22%21% 22% 21% 21% 1%1%1% 1% 1% 1% 5%5%5% 5% 5% 5% $- $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 $13,000,000 $14,000,000 2013 2014 2015 2016 2017 2018 General government Public safety Health and welfare Highways and streets Urban redevelopment and housing Culture and recreation ©2019 CliftonLarsonAllen LLPCreate Opportunities Water Fund Operations •Operating revenues increased 5.9% (or $108K) from prior year •Operating expenses down 13.1% (or $198K) from prior year •(supplies, pumps & wells maint, contracted services) •Cash flow provided by operations $792K in 2018 •Covering depreciation Financial Results 8 $(300,000) $(100,000) $100,000 $300,000 $500,000 $700,000 $900,000 $1,100,000 $1,300,000 $1,500,000 $1,700,000 $1,900,000 2014 2015 2016 2017 2018 Operating Revenues Operating Expenses (excludes depreciation) Depreciation Expense Operating Income (before depreciation) Operating Income ©2019 CliftonLarsonAllen LLPCreate Opportunities Sewer Fund Operations •Operating revenues increased 3.0% (or $82K) from prior year •Operating expenses down 2.5% (or $53K) from prior year •Cash flow provided by operations $533K in 2018 •Covering depreciation Financial Results 9 $- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 $2,200,000 $2,400,000 $2,600,000 $2,800,000 $3,000,000 2014 2015 2016 2017 2018 Operating Revenues Operating Expenses (excludes depreciation) Depreciation Expense Operating Income (before depreciation) Operating Income ©2019 CliftonLarsonAllen LLPCreate Opportunities Storm Sewer Fund Operations •Operating revenues decreased 3.3% (or $28K) from prior year •Operating expenses down 27.6% (or $53K) from prior year •(~46K of additional maint exp in 2017) •Cash flow provided by operations $667K in 2018 •Covering depreciation Financial Results 10 $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 2014 2015 2016 2017 2018 Operating Revenues Operating Expenses (excludes depreciation) Depreciation Expense Operating Income (before depreciation) Operating Income ©2019 CliftonLarsonAllen LLPCreate Opportunities •Other Financial Highlights –Financial statements and the required OSA Financial Reporting form were submitted to the required state agency before the deadline June 30, 2019. –Comprehensive Annual Financial Report was submitted to the GFOA before the deadline June 30, 2019. •Last year, for the 2017 CAFR, the City was awarded the GFOA Certificate for Excellence in Financial Reporting. Other Highlights and Accomplishments 11 ©2019 CliftonLarsonAllen LLPCreate Opportunities •Effective December 31, 2019 year-end: –Governmental Accounting Standards Board Statement No. 84 ◊Fiduciary Activities •Effective December 31, 2020 year-end: –Governmental Accounting Standards Board Statement No. 87 ◊Leases Emerging Issues 12 ©2019 CliftonLarsonAllen LLPCLAconnect.com Thank You! Dennis Hoogeveen, Principal (612) 397-3063 Dennis.Hoogeveen@CLAconnect.com John Lorenzini, Manager (612) 397-3268 John.Lorenzini@CLAconnect.com 1 3 CITY OF HOPKINS, MINNESOTA EXECUTIVE AUDIT SUMMARY (EAS) DECEMBER 31, 2018 CITY OF HOPKINS, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2018 AUDIT REPORT SUMMARY 1 FINANCIAL RESULTS GOVERNMENT-WIDE FINANCIAL STATEMENTS 2 GENERAL FUND 4 ENTERPRISE FUNDS 5 APPENDIX A FORMAL REQUIRED COMMUNICATIONS 6 APPENDIX B INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 10 SCHEDULE OF FINDINGS AND RESPONSES 12 APPENDIX C INDEPENDENT AUDITORS’ REPORT ON LEGAL COMPLIANCE 14 (1) AUDIT REPORT SUMMARY We prepared this Executive Audit Summary and Management Report in conjunction with our audit of the City of Hopkins, Minnesota’s (the City’s) financial records for the year ended December 31, 2018. The following is a summary of reports we have issued: Audit Opinion The financial statements are fairly stated in accordance with generally accepted accounting principles. We issued an “unmodified” audit opinion. Yellow Book Opinion Our report on internal control over financial reporting noted one material weakness as a result of audit adjustments and one significant deficiency related to approval of invoices. Minnesota Legal Compliance No compliance issues were reported with respect to Minnesota Statutes. CITY OF HOPKINS, MINNESOTA FINANCIAL RESULTS DECEMBER 31, 2018 (2) GOVERNMENT-WIDE FINANCIAL STATEMENTS Statement of Net Position The Statement of Net Position reflects what the 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 left over to use for providing services after its debts are settled. However, those resources are not always in expendable form, or there may be restrictions on how some of those resources can be used. For instance, net investment in capital assets is the largest classification and reflects the balance of infrastructure (streets, storm water, sidewalks, etc.) and other assets net of the debt incurred to finance them and therefore, not cash available for use. In order to address this, the statement divides the net position into three components: net investment in capital assets, restricted net position, and unrestricted net position. The following is a condensed version of the Statement of Net Position at December 31, 2018: Governmental Business-Type Activities Activities Total Assets: Current Assets 31,482,784$ 3,493,480$ 34,976,264$ Capital Assets 85,900,124 37,996,931 123,897,055 Total Assets 117,382,908 41,490,411 158,873,319 Deferred Outflows of Resources: Deferred Charge on Refunding 187,149 - 187,149 Pensions 5,337,385 188,041 5,525,426 Liabilities: Current Liabilities 4,942,359 508,088 5,450,447 Long-Term Liabilities 71,544,142 10,559,821 82,103,963 Total Liabilities 76,486,501 11,067,909 87,554,410 Deferred Inflows of Resources: Pensions 7,169,642 249,428 7,419,070 Net Position: Net Investment in Capital Assets 37,136,053 28,627,563 65,763,616 Restricted 16,400,804 - 16,400,804 Unrestricted (14,285,558) 1,733,552 (12,552,006) Total Net Position 39,251,299$ 30,361,115$ 69,612,414$ A significant portion of the City’s net position translate into restricted net position by virtue of external restrictions (statutory reserves) or by the nature of the fund they are in (e.g., equity in a debt service fund typically can only be spent on future repayment of debt). CITY OF HOPKINS, MINNESOTA FINANCIAL RESULTS DECEMBER 31, 2018 (3) GOVERNMENT-WIDE FINANCIAL STATEMENTS (CONTINUED) 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. This statement 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 is a condensed version of the Statement of Activities for the year ended December 31, 2018: Functions/Programs Expenses Program Revenue Difference Governmental Activities: General Government 4,362,109$ 3,311,748$ (1,050,361)$ Public Safety 7,846,565 1,326,750 (6,519,815) Health and Welfare 196,435 217,763 21,328 Highways and Streets 4,562,075 8,006,389 3,444,314 Urban Redevelopment and Housing 2,352,139 1,020,987 (1,331,152) Culture and Recreation 2,015,291 1,597,248 (418,043) Interest on Long-Term Debt 65,784 - (65,784) Total Governmental Activities 21,400,398 15,480,885 (5,919,513) Business-Type Activities: Water 1,704,965 1,946,509 241,544 Sewer 2,288,938 2,780,290 491,352 Storm Sewer 461,036 806,605 345,569 Refuse 910,481 1,000,195 89,714 Pavilion/Ice Arena 689,178 395,194 (293,984) Housing and Redevelopment Authority 677,169 588,018 (89,151) Total Business-Type Activities 6,731,767 7,516,811 785,044 Total Governmental and Business-Type Activities 28,132,165$ 22,997,696$ (5,134,469) General Revenues: Property Taxes 14,344,020 Tax Increments 2,433,504 Grants and Contributions, Not Restricted 59,748 Unrestricted Investment Earnings 238,490 Gain on Disposal of Capital Assets 62,212 Total General Revenues, Special Items, and Transfers 17,137,974 Change in Net Position 12,003,505$ CITY OF HOPKINS, MINNESOTA FINANCIAL RESULTS DECEMBER 31, 2018 (4) GENERAL FUND The following table presents the City’s General Fund revenue sources for each of the past five years. The most significant component is property taxes which amounted to $10,543,110 for 2018. It is important that the City operate governmental and enterprise funds effectively so that there is not a need to be subsidized by the General Fund. $0$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 2014 2015 2016 2017 2018 General Fund Revenue by Source Years Ended December 31, Taxes Intergovernmental Charges for Services License and Permits Other The following table presents the City’s General Fund expenditures for each of the past five years. The most significant component is public safety which amounted to $7,461,507 for 2018. $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 2014 2015 2016 2017 2018 General Fund Expenditures by Function Years Ended December 31, General Governmental Public Safety Health & Welfare Highways & Streets Culture & Recreation Capital Outlay Urban Redevelopment and Housing CITY OF HOPKINS, MINNESOTA FINANCIAL RESULTS DECEMBER 31, 2018 (5) GENERAL FUND (CONTINUED) Fund Balance – Total fund balance of the City’s General Fund decreased by $234,601 during fiscal 2018, from $5,852,287 to $5,617,686 at December 31, 2018. A City’s fund balance in the General Fund is an important aspect in considering the City’s financial well-being since a healthy fund balance represents things such as the availability of general cash flows, as a cushion against unanticipated expenditures, funding deficiencies and similar problems. At December 31, 2018, the unassigned fund balance as a percentage of annual expenditures was 37.8% or approximately 20 weeks of expenditures. In order to properly analyze fund balance levels you must review all categories of fund balance (nonspendable, restricted, committed, and assigned) as well as growth indicators of the City. The percentage above is average for established communities such as the City of Hopkins. Budget to Actual – Total revenues in the General Fund were $56,696 (approx. 0.4%) higher than the budgeted amount while total expenditures were $291,297 (approx. 2.2%) higher than had been budgeted. After considering operating transfers, the net effect was a decrease to total fund balance that was $234,601 more than had been reflected in the City’s budget. As part of any budget update initiated for fiscal 2018, the Council will want to take this and other budget variances into consideration in order to limit future budget differences to every extent possible. ENTERPRISE FUNDS The enterprise funds (Water Utility, Sewer Utility, Storm Sewer Utility, Refuse Utility, Pavilion/Ice Arena, and Housing Authority Funds) have a healthy combined net position balance in the amount of $30,361,115 as of December 31, 2018. The largest portion of this being an investment in infrastructure and other capital assets net of related debt in the amount of $28,627,563. (6) APPENDIX A FORMAL REQUIRED COMMUNICATIONS Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited the financial statements of the governmental activities, the busines s-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota (the City) as of and for the year ended December 31, 2018, and have issued our report thereon dated June 20, 2019. We have previously communicated to you 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. Professional standards also require that we communicate to you the following information related to our audit. Significant audit findings Qualitative aspects of accounting practices 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 to the financial statements. As described in the Notes, during the fiscal year ended December 31, 2018, the City changed accounting policies related to its accounting for pensions by adopting Statement of Governmental Accounting Standards (GASB) Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions. During the fiscal year ended December 31, 2018, the City early-adopted Statement of Governmental Accounting Standards (GASB) Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period. We noted no transactions entered into by the entity 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. Accounting estimates 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. Honorable Mayor and Members of the City Council City of Hopkins, Minnesota (7) The most sensitive estimates affecting the financial statements were: Management’s estimate of the useful lives of capital assets is based on authoritative guidance and past experience. Management’s estimate of the investments at fair value is based on published market values at December 31, 2018. Management’s estimate of for other postemployment benefits is based on the actuarial valuation conducted by an independent third party. Management’s estimate of the amount of the year-end compensated absences payable balance to be taken by employees within one year of December 31, 2018. Management’s estimate of the City’s proportionate share of the PERA’s GERF and PEPFF and Hopkins Fire Relief Association’s net pension liabilities, as well as the deferred inflows and outflows, is based on guidance from GASB Statement No. 68, GASB Statement No. 71, and the plans’ allocation tables. The plans’ allocation tables allocate a portion of the plans’ net pension liabilities based on the City’s contributions during the plan’s fiscal years as a percentage of total contributions received for the related fiscal year by the plans. We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. Financial statement disclosures Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. There were no particularly sensitive financial statement disclosures. The financial statement disclosures are neutral, consistent, and clear. Difficulties encountered in performing the audit The completion of our audit was delayed due to delays in receiving required audit information from management. Uncorrected misstatements Professional standards require us to accumulate all misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. The following summarizes uncorrected misstatements of the financial statements. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The City passed on recording fire state aid as a deferred inflow in the General Fund. A late submission by the Fire Relief Association resulted in a delay of when the 2018 fire state aid was received. Because the state aid was received later than 60 days after year-end, this revenue was not “available” for the year ended December 31, 2018. As a result of passing on this adjustment, revenue and change in fund balance for the General Fund are overstated by $107,988. The City passed on adjusting Fire Relief Association deferred outflows for the subsequent contributions to include the state aid contribution in addition to the City’s municipal contribution. Honorable Mayor and Members of the City Council City of Hopkins, Minnesota (8) As a results of passing on this adjustment, Governmental Activities expenses are overstated by $107,988 and deferred outflows and change in net position are understated by $107,988. Corrected misstatements The following material misstatement detected as a result of audit procedures was corrected by management: An adjustment was made to reduce intergovernmental revenue and increase deferred inflows by $805,700 in the Economic Development fund for a grant receivable that was not received within the City’s period of availability for fiscal year 2018. Disagreements with management For purposes of this letter, a disagreement with managem ent is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditors’ report. No such disagreements arose during our audit. Management representations We have requested certain representations from management that are included in the management representation letter dated June 20, 2019. 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 entity’s financial statements or a determination of the type of auditors’ 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. Significant issues discussed with management prior to engagement We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to engagement as the entity’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses. Other information in documents containing audited financial statements With respect to the required supplementary information (RSI) accompanying the financial statements, we made certain inquiries of management about the methods of preparing the RSI, including whether the RSI has been measured and presented in accordance with prescribed guidelines, whether the methods of measurement and preparation have been changed from the prior period and the reasons for any such changes, and whether there were any significant assumptions or interpretations underlying the measurement or presentation of the RSI. We compared the RSI for consistency with management’s responses to the foregoing inquiries, the basic financial statements, and other knowledge obtained during the audit of the basic financial statements. Because these limited procedures do not p rovide sufficient evidence, we did not express an opinion or provide any assurance on the RSI. With respect to the combining and individual nonmajor fund statements and schedules (collectively, the supplementary information) accompanying the financial statements, on which we were engaged to report in relation to the financial statements as a whole, 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 Honorable Mayor and Members of the City Council City of Hopkins, Minnesota (9) preparing it has not changed from the prior period or the reasons for such changes, and the information is appropriate and complete in relation to our audit of the f inancial 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 have issued our report thereon dated June 20, 2019. The introductory and statistical sections accompanying the financial statements, which is the responsibility of management, was prepared for purposes of additional analysis and is not a required part of the financial statements. Such information was not subjected to the auditing procedures applied in the audit of the financial statements, and, accordingly, we did not express an opinion or provide any assurance on it. Our auditors’ opinion, the audited financial statements, and the notes to financial statements should only be used in their entirety. Inclusion of the audited financial statements in a document you prepare, such as an annual report, should be done only with our prior approval and review of the document. This communication is intended solely for the information and use of the Mayor, members of the City Council, and management of the City and is not intended to be, and should not be, used by anyone other than these specified parties. CliftonLarsonAllen LLP Minneapolis, Minnesota June 20, 2019 (10) APPENDIX B INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota (the City), as of and for the year ended December 31, 2018, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 20, 2019. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and responses, we did identify certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and responses as item 2018-001 to be a material weakness. Honorable Mayor and Members of the City Council City of Hopkins, Minnesota (11) A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying schedule of findings and responses as item 2018-002 to be a significant deficiency. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. The City’s Response to Findings The City’s responses to the findings identified in our audit are described in the accompanying schedule of findings and responses. The City’s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. CliftonLarsonAllen LLP Minneapolis, Minnesota June 20, 2019 CITY OF HOPKINS, MINNESOTA SCHEDULE OF FINDINGS AND RESPONSES YEAR ENDED DECEMBER 31, 2018 (12) Section I – Summary of Auditors’ Results Financial Statements Type of auditors’ report issued: Unmodified 1. Internal control over financial reporting: Material weakness(es) identified? x yes no Significant deficiency(ies) identified? x yes none reported 2. Noncompliance material to financial statements noted? yes x no Section II – Financial Statement Findings 2018-001: Material Audit Adjustments Type of Finding: Material Weakness in internal controls over financial reporting. Criteria: An effective internal control system over financial reporting provides reasonable assurance that assets are safeguarded against loss and theft, and that reliable financial statements are prepared in accordance with the appropriate accounting standards and in compliance with applicable laws and regulations. Condition/Context: Material audit adjustments were necessary to properly present the financials. Effect: Material adjustments were proposed throughout the audit and subsequently recorded by management. Cause: The City’s procedures and processes were not sufficient to ensure all accounts are adjusted to their appropriate year-end balances in accordance with GAAP. Recommendation: We recommend that the City ensure its internal controls over financial reporting and year-end closing procedures are operating effectively to ensure accurate financial reporting. Management Response: Management agrees with the recommendation. The City is committed to ensuring that the department’s procedures produce accurate financial reporting, and reduce the occurrence of material audit adjustment going-forward. CITY OF HOPKINS, MINNESOTA SCHEDULE OF FINDINGS AND RESPONSES (CONTINUED) YEAR ENDED DECEMBER 31, 2018 (13) Section II – Financial Statement Findings (Continued) 2018-002: Disbursements Approval Type of Finding: Significant deficiency in internal controls over financial reporting. Criteria: The City’s internal control procedures require that disbursements have approval from the appropriate personnel prior to payment. Additionally, documentation of this approval should be retained. Condition/Context: Documentation showing evidence of approval for 2 out of 25 disbursements sampled during our audit procedures was not available. Effect: Without proper approval and supporting documentation of internal controls, the City is at an increased risk of funds being disbursed that are not in accordance with the City’s programs, policies and goals. Cause: These disbursements were reoccurring types of vendor expenses and the City did not obtain individual approval for these invoices. Recommendation: We recommend that the City review its procedures and ensure its internal controls are functioning as designed and that personnel are trained on what the City’s procedures are. Management Response: Management agrees with the recommendation. The City will ensure that the department’s procedures are in place and operating effectively going-forward. Section III – Minnesota Legal Compliance Findings None noted (14) INDEPENDENT AUDITORS’ REPORT ON MINNESOTA LEGAL COMPLIANCE Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota (the City), as of and for the year ended December 31, 2018, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 20, 2019. The Minnesota Legal Compliance Audit Guide for Cities promulgated by the State Auditor pursuant to Minn. Stat. §6.65, identifies seven categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our audit considered all of the listed categories. In connection with our audit, nothing came to our attention that caused us to believe that the City failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Cities. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City’s noncompliance with the above-referenced provisions, insofar as they relate to accounting matters. The purpose of this report is solely to describe the scope of our testing of compliance relating to the provisions of the Minnesota Legal Compliance Audit Guide for Cities and the results of that testing, and not to provide an opinion on compliance. Accordingly, this report is not suitable for any other purpose. CliftonLarsonAllen LLP Minneapolis, Minnesota June 20, 2019