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Memo - 2008 Comprehensive Annual Financial ReportCITY OF HOPKINS MEMORANDUM Date: July 16, 2009 To: Mayor & City Council From: Christine Harkess, Finance Director �J Subject: 2008 Comprehensive Annual Financial Report (CAFR) Staff has prepared a presentation of a consolidated version of the 2008 Comprehensive Annual Financial Report (CAFR). Brock Geyen of our audit firm LarsonAllen, LLC will be present to review the results of the 2008 audit to the City Council and public. Supporting Information • 2008 Comprehensive Annual Financial Report Independent Auditor's Report 2008 Executive Audit Summary Power point presentation 1:12 Financial Report City of Hopkins An Overview of the 2008 Comprehensive Annual Financial Report City of Hopkins All information is public. Economic Condition Major initiatives Revenues by fund types Expenditures by fund types Statement of Net Assets Statement of Activities 1 The City of Hopkins presents its Comprehensive Annual Financial Report This presentation 77 provides a broad " overview of our financial performance and position. All information is public. Economic Condition Major initiatives Revenues by fund types Expenditures by fund types Statement of Net Assets Statement of Activities 1 Economic Condition • Valuation of new non - residential construction was $30.5 million in 2008. • There remains an viable economic development and redevelopment market within the City of Hopkins. • An additional $198 million of construction is projected over the next several years. Significant Projects in 2008 • L.A. Fitness $ 5.0 million • Excelsior Crossing II $40.0 million • Oakridge Lofts $ 4.6 million 2 Future Projects • Atlas Site Redevelopment $62 million • Excelsior Crossing Phase III $40 million • Marketplace & Main Apts $56 million • 5t" Avenue Flats $40 million Major Municipal Initiatives • Street repair and improvements - $1,105,000 • Utility improvement projects - $366,000 • Moline & Well #1 Improvements - $84,000 • Van Buren /Hiawatha Ave culvert - $200,000+ ■ Park Improvements — $89,000 ■ Hopkins Activity Center Improvements — $12,00 ■ Conversion of large commercial water meters to radio read system. "c] Financial Highlights ■ Assets exceeded liabilities by approximately $60.9 million iM , k — About 77% is capital assets ($46.9 m) — $3.9 million can be used for ongoing obligations ■ Governmental funds fund balances totaled $12.8 million, an decrease of $10.7 million ■ Unreserved fund balance of the General Fund totaled $3.9 million or 39% of expenditures ■ Debt decreased $11.98 million due bond maturities ($2.2m) and prior period adj for defeased debt ($9.78m) Financial Highlights - cont ■ Governmental Activities — Property tax revenues increased due to debt service levies and operations — Program grants were received for specific programs ■ Business Type Activities — Charges for service increased due to rate increases — Program grants increased • Primarily for HRA programs 0 $2,847 $843,882 $2,880,585 General ■ Special Revenue Capital ® Debt Enterprise IW Internal Service 5 Statement of Net Assets Total Assets (in thousands) 2008 2007 Assets - Accounts payable $ 553 1"011 -Cash and short-term investments $13,739 $29,011 -Other liabilities -Taxes & special assessments receivable 7,883 8,459 27,291 -Other receivables 5,734 6,038 564 -Other assets and debits 65,715 65,355 Total Assets $ 93,071 $108,863 Liabilities - Accounts payable $ 553 $5,616 - Accrued compensation 271 198 -Other liabilities 4,086 3,503 -Long term debt 27,291 38,297 Total Liabilities I $32,201 I $47,614 Total Net Assets $60,870 $61,249 Statement of Activities Governmental Fund Types, (in thousands) 2008 2007 Revenues - Property taxes and special assessments $10,684 $9,783 - Charges for service 873 760 - Operating grants & contributions 1,949 2,123 - Capital grants & contributions 170 1,678 - Grants & contributions not restricted 434 564 -Other revenues 549 910 Total Revenues $14,659 $15,818 Expenditures - General government $1,722 $1,679 - Public safety 6,171 5,665 - Highways & streets 3,155 2,870 - Culture & recreation 1,565 1,278 -Other expenditures 1,275 2,093 - Interest on longterm debt 1,090 1,070 Total Expenditures $14,978 $14,655 Change in Net Assets $ (319) $ 1,163 2 Statement of Activities Proprietary Fund Types, (in thousands) 1 20081 2007 Revenues Fund Type Fund Balance — Charges for services $4,809 $4,693 — Operating grants & contributions 252 299 — Capital grants & contributions 395 0 —Other revenues 22 88 Total Revenues and Other Sources $5,477 $5,080 Expenditures ■ Debt Service funds —Water $1,356 $1,241 —Sewer 1,756 1,784 —Storm sewer 418 416 — Refuse 771 732 — Pavilion /Ice Arena 411 385 — Housing & Redevelopment Authority 680 484 — Transfers 145 145 Total Expenditures and Other Uses 1 $5,5371 $5,187 Excess Revenues over Expenditures 1 ($60)1 ($107) Fund Equity 7 Fund Type Fund Balance Incr /(Decr) ■ General Fund $ 3,996,115 ($ 465,756) ■ Special Revenue Funds $ 4,145,601 ($ 61,942) ■ Capital Project Funds $1,381,657 ($ 427 051) ■ Debt Service funds $3,250,202 ($8,975,247) ■ Enterprise Funds $16,361,423 ($ 60,289) ■ Internal Service Funds $ 4,107,499 ($ 149,955) 7 M CAFR — Changes in Reporting ■ In 2008 we implemented GASB No. 45 Other Post Employment Benefits (OPEB) disclosure — Disclose liability for post employment benefits (health care) ■ In 2009 we will implement GASB No. 54 regarding classification of fund balances s LarsonAllen' LLP CPAs, Consultants & Advisors www.larsonallen.com INDEPENDENT AUDITORS' REPORT Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited the accompanying 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 as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota as of December 31, 2008, and the respective changes in financial position and cash flows, where applicable, thereof and the bud etary comparison for the general fund and the special revenue fund for the year then ended in conformity - v - th U.S. generally accepted accounting principles. As discussed in Note 14 to the financial statements, the City restated the December 31, 2007 beginning fund balance to correct reporting of escrow investments related to defeased debt. In accordance with Government Auditing Standards, we have also issued our report dated June 15, 2009, on our consideration of the City of Hopkins, Minnesota's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. " I' . = Larson Ulen LLP is a member of Nexia International, a worldwide nerwork of inde endent accounting and consulting firms. INTERNATIONAL Honorable Mayor and Members of the City Council The management's discussion and analysis and schedule of funding. progress as listed in the table of contents is not a required part of the basic financial statements but is supplemental information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquires of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Hopkins' basic financial statements. The introductory section, combining and individual fund statements and schedules and the statistical section are presented for purposes of additional analysis and are not a required part of the�basic financial statements. The combining and individual fund statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical section have not been subjected to the audit procedures applied in the audit of the basic financial statements and, accordingly, vVe express no opinion on them. Minneapolis, Minnesota June 15, 2009 LarsonAllen LLP r -i t 14 CITY OF HOPKINS EXECUTIVE AUDIT SUMMARY (EAS) DECEMBER 31, 2008 A CITY OF HOPKINS TABLE OF CONTENTS DECEMBER 31, 2008 AUDIT REPORT SUMMARY FINANCIAL RESULTS 1 GOVERNMENT -WIDE FINANCIAL STATEMENTS 2 GENERALFUND 4 ENTERPRISE FUNDS 5 APPENDIX A FORMAL REQUIRED COMMUNICATIONS 6 APPENDIX B 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 9 APPENDIX C REPORT ON MINNESOTA LEGAL COMPLIANCE 11 NEW ACCOUNTING AND REPORTING STANDARDS ACCOUNTING AND FINANCIAL REPORTING FOR INTANGIBLE ASSETS (GASB STATEMENT NO. 51) 12 LAND AND OTHER REAL ESTATE HELD AS INVESTMENTS BY ENDOWMENTS (GASB STATEMENT NO. 52) 12 FUND BALANCE REPORTING CHANGES (GASB STATEMENT NO. 54) 12 LarsonAllerf LLP CPAs, Consultants & Advisors www.larsonallen.com - Audit Report Summary We prepared this Executive Audit Summary and Management Report in conjunction with our audit of the City's financial records for the year ended December 31, 2008. The following is a summary of reports we have issued: Audit Opinion The financial statements are fairly stated. We issued an "unqualified" audit opinion. Yellow Book Opinion Our report on internal control includes a material weakness for a prior period adjustment. Legal Compliance No compliance issues were reported with respect to Minnesota Statutes. Significant Reporting Changes from Prior Year Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions was implemented during fiscal year ending December 31, 2008. The affect was addition of $82,786 of other post - employment benefit (OPEB) liabilities to the financial statements as of December 31, 2008. Details can be found in Note 10 of the Comprehensive Annual Financial Report. (1) FINANCIAL RESULTS GOVERNMENT -WIDE FINANCIAL STATEMENTS Statement of Net Assets The Statement of Net Assets reflects what the City owns and owes at a given point in time, the last day of the fiscal year. Theoretically, net assets represent the resources the City has leftover 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, invested in capital assets -net of related debt is the largest classification and reflects the balance of infrastructure (streets, storm water, side walks, 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 assets into three components: net assets invested in capital assets -net of related debt, restricted net assets, and unrestricted net assets. The following is a condensed version of the Statement of Net Assets at December 31, 2008: Governmental Business -Type Activities Activities Total Assets: Current Assets Capital Assets Total Assets Liabilities: Current Liabilities Long -Term Liabilities Total Liabilities Net Assets: Invested in Capital Assets, Net of Related Debt Restricted Unrestricted Total Net Assets $ 26,664,408 46,206,295 72,870,703 6,358,922 22,003,413 28,362,335 30, 769, 922 10,074,674 3,663,772 280,214 $ 44,508,368 $ 16,361,423 691,934 19, 508, 822 20,200,756 895,484 2,943,849 3,839,333 16,081,209 $ 27,356,342 65,715,117 93, 071,459 7,254,406 24,947,262 32,201,668 46,851,131 10,074,674 3,943,986 $ 60, 869, 791 A significant portion of the City's net assets translate into restricted net assets 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). (2) 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 assets. These amounts represent the full cost of providing services. This statement provides amore 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, 2008: Functions /Programs Governmental Activities: General Government Public Safety Health and Welfare Highways and Streets Urban Redevelopment and Housing Culture and Recreation Interest on Long -Term Debt Total Governmental Activities Business -Type Activities: Water Sewer Storm Sewer Refuse Pavilion /Ice Arena Housing and Redevelopment Authority Total Business -Type Activities Expenses Program Revenue $ 1,721,624 $ 354,420 6,171,249 1,187,137 236,858 204,307 3,154,762 191,250 1,037,927 308,635 1,565,184 746,407 1,090,341 - 14,977,945 2,992,156 1,356,448 1,188,610 1,756,489 1,474,474 417,595 725,029 771,107 738,046 411,134 424,766 679,994 904,839 5,392,767 5,455,764 Difference $ (1,367,204) (4,984,112) (32,551) (2,963,512) (729,292) (818,777) (1,090,341) (11,985,789) (167,838) (282,015) 307,434 (33,061) 13,632 224,845 62,997 Total Governmental and Business -Type Activities $ 20,370,712 $ 8,447,920 General Revenues: Property Taxes Tax Increments Grants and Contributions Not Restricted Unrestricted Investment Earnings Gain on Sale of Capital Assets Total General Revenues, Special Items, and Transfers Change in Net Assets (11,922,792) 9,497,650 1,186,395 434,163 409,138 16,150 11,543,496 $ (379,296) (3) GENERAL FUND The following table presents the City's General Fund revenue sources for each of the past three years. The most significant component is property taxes which amounted to $7,497,680 for 2008. 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. General Fund Revenue by Source Years Ended December 31, $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 ■Taxes ■ Intergovernmental ❑ Charges for Services ❑ License and Permits ■ Other The following table presents the City's General Fund expenditures for each of the past three years. The most significant component is public safety which amounted to $5,598,958 for 2008. General Fund Expenditures by Function Years Ended December 31, $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 2006 ■General Governmental ❑ Highways & Streets 2007 • Public Safety • Culture & Recreation 2008 ❑ Health & Welfare ® Capital Outlay (4) 2006 2007 2008 GENERAL FUND (CONTINUED) Fund Balance — Total fund balance of the City's General Fund decreased by $465,756 during fiscal 2008 from $4,461,871 to $3,996,115 'at December 31, 2008. 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 cash flow, as a cushion against unanticipated expenditures, funding deficiencies and similar problems. At December 31, 2008, the unreserved fund balance as a percentage of annual expenditures is 39.0% or approximately 21 weeks of expenditures. This compares to 35.0% or approximately 18 weeks of expenditures as of December 31, 2007. In order to properly analyze fund balance levels you must review fund balance reservations and designations 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 $63,914 (or 0.7 %) less than the budgeted amount while total expenditures were $409,481 (or 4.3 %) more than had been budgeted. After considering operating transfers, the net effect was a decrease to total fund balance that was $465,756 more than had been reflected in the City's budget. As part of any budget update initiated for fiscal 2009, the Council will want to take this and other budget variances into consideration in order to limit future budget differences to every extent possible. While we recognize that the above variances are in part due to conservative budgeting, we generally like to recommend that budget variances in a city's environment be limited to 1 % to 2% on either side of zero. ENTERPRISE FUNDS The enterprise funds (Water Utility, Sewer Utility, Storm Water Utility, Refuse Utility, and Pavilion /Ice Arena Fund) have a healthy combined net asset balance in the amount of $16,361,423 as of December 31, 2008. The largest portion of this being an investment in infrastructure and other capital assets net of related debt in the amount of $16,081,209. (5) LarsonAlleno LLP CPAs, Consultants & Advisors www.larsonallen.com APPENDIX 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 business -type activities, each major fund, and the aggregate remaining fund information of City of Hopkins for the year ended December 31, 2008, and have issued our report thereon dated June 15, 2009. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter dated January 9, 2009, our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement. 2. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. 3. We are also responsible for communicating matters regarding the provisions of the Minnesota Legal Compliance Audit Guide for Local Government, promulgated by the State Auditor pursuant Minnesota Statute 6.65. h o r.��; L.arsonAllen LLP is a member of Nexia Intemational, ide network of independent accounting and consulting firms INPERNATIONAL Honorable Mayor and Members of the City Council City of Hopkins Other Information in Documents Containing Audited Financial Statements Our audit 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 client prepared document, such as an annual report, should be done only with our prior approval and review of the document. Our responsibility for other information in documents containing the entity's financial statements and report does not extend beyond the financial information identified in the report. We do not have an obligation to perform any procedures to corroborate other information contained in such documents. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on February 2, 2009. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by City of Hopkins are described in Note 1 to the financial statements. No new accounting policies were adopted during 2008, except for Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, and GASB Statement No. 50, Pension Disclosures -an Amendment of GASB Statements No. 25 and No. 27. The adoption of GASB Statements No. 45, No. 49, and No. 50 did not have a significant impact on the City's financial statements. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. 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: 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, 2008. Estimated current portion of compensated absences payable — 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, 2008 is based on historical trends and anticipated leave time activity. 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. (7) Honorable Mayor and Members of the City Council City of Hopkins Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. 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. There were no misstatements detected as a result of audit procedures that were material, either individually or in the aggregate, to the financial statements taken as a whole. Management did not identify and we did not notify them of any uncorrected financial statement misstatements. Disagreements with Management For purposes of this letter, 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 auditors' 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 June 15, 2009. 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 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. 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. This information is intended solely for the use of the Members of the City Council and management of the City of Hopkins and is not intended to be and should not be used by anyone other than these specified parties. LarsonAllen LLP Minneapolis, Minnesota June 15, 2009 In LarsonAlled LLP CPAs, Consultants & Advisors www.larsonallen.com APPENDIX B 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 the financial statements of the governmental activities, business -type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins, Minnesota as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated June 15, 2009. We conducted our audit 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. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures 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 over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Our consideration of internal control was for the limited purpose described in the first paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. However, as discussed below, we identified a deficiency in internal control that we consider to be a material weakness. A! ; , y v *& LarsonAllen LLP is a member ofNexia Internation�all, worldwide network of independent accounting and consulting firms. INTERNATIONAL Honorable Mayor and Members of the City Council City of Hopkins Prior Period Adjustment Condition: During review of an escrow account agreement, it was noted that there was a material misstatement in the December 31, 2007 financial statements. Specifically, refunding bond proceeds placed in an irrevocable trust escrow account during 2007 should have effectively defeased the existing debt but the debt and related escrow cash continued to be reported on the December 31, 2007 financial statements. This misstatement was corrected by adjusting beginning net assets and beginning fund balance. The absence of a complete control procedure or process in this area is considered a material weakness because the potential exists that a material misstatement of the financial statements could occur and not be prevented or detected by the City's internal control processes. Criteria: The City should have controls in place to prevent and detect a material misstatement in the financial statements in a timely manner. Management is responsible for the accuracy and completeness of all financial records and related information. Their responsibilities include adjusting the financial statements to correct material misstatements. Effect: Correction of a material misstatement in the financial statements. Cause: The City has not established controls to ensure that all accounts are adjusted to their appropriate year -end balances in accordance with GAAP. Recommendation: We recommend the City continue to evaluate its internal control processes to determine if additional internal control procedures should be implemented to ensure that accounts are adjusted to their appropriate year -end balances in accordance with GAAP. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of 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 test disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the City Council, management, the Office of the State Auditor, and state and federal awarding agencies and is not intended to be and should not be used by anyone other than these specified parties. LarsonAllen LLP Minneapolis, Minnesota June 15, 2009 LarsenAllen LLP CPAs, Consultants & Advisors www.larsonallen.com APPENDIX C REPORT ON MINNESOTA LEGAL COMPLIANCE Honorable Mayor and Members of the City Council City of Hopkins, Minnesota We have audited the financial statements of the governmental activities, business -type activities, each major fund, and the aggregate remaining fund information of the City of Hopkins as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated June 15, 2009. We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the provisions of the Minnesota Legal Compliance Audit Guide for Local Government, promulgated by the State Auditor pursuant to Minn. Statutes Section 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers seven main 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 study included all of the listed categories. The results of our tests indicate that for the items tested the City complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the information and use of the City Council, management of the City, and the Office of the Minnesota State Auditor and is not intended to be and should not be used by -- anyone other than these specified parties. �^•z LLr LarsonAllen LLP Minneapolis, Minnesota June 15, 2009 �:�l � LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms. INTERNATIONAL NEW ACCOUNTING AND REPORTING STANDARDS Accounting and Financial Reporting for Intangible Assets (GASB Statements No. 51) This statement is effective for periods beginning after June 15, 2009 and, therefore, is applicable to the City for the year ended December 31, 2010. The purpose of this statement is to eliminate the inconsistencies in accounting and reporting between governmental entities related to intangible items such as easements, rights, patents, trademarks, software, and donated assets. Land and Other Real Estate Held as Investments by Endowments (GASB Statements No. 52) This statement is effective for periods beginning after June 15, 2008 and, therefore, is applicable to the City for the year ended December 31, 2009. This standard changes reporting of land and other real estate held as investments by endowments from a historical cost basis to fair value. The affect of this change will align financial reporting for these assets with the objective of endowments which is to invest resources for the purpose of generating income. Fund Balance Reporting Changes (GASB Statement No. 54) In March 2009, the Governmental Accounting Standards Board GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The requirements of this Statement are effective for the fiscal year ending December 31, 2011. Earlier adoption and implementation is encouraged. Statement No. 54 distinguishes between fund balance amounts that are considered non - spendable, such as fund balance associated with inventories, and other amounts that are classified based on the relative ability to be spent. Beginning with the most non - spendable classification, fund balances will be reported in the following classifications: • Restricted— amounts constrained by external parties, constitutional provision, or enabling legislation. • Committed — includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision - making authority. • Assigned — amounts a government intends to use for a particular purpose. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. • Unassigned — amounts that are not constrained at all will be reported in the general fund or to report deficit balances in other governmental funds. The new standard also clarifies the definitions of individual governmental fund types. The statement interprets certain terms within the definition of special revenue fund types, while further clarifying the debt service and capital projects fund type definitions. The statement also specifies how economic stabilization or "rainy -day" amounts should be reported as a component of fund balance in the general fund. Under GASB No. 54, it is no longer considered appropriate to include these types of funds as a special- revenue fund. For financial reporting purposes, stabilization should be regarded as a "restricted" or "committed" classification only if the city details the circumstances or conditions that signal the need_ for stabilization in sufficient detail. Otherwise, these amounts should be reported as "unassigned" in the general fund. (12)