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2012 Comprehensive Annual Fianancial ReportCITY OF HOPKINS FINANCE DEPARTMENT MEMORANDUM Date: July 23, 2013 To: Mayor & City Council From: Christine Harkess, Finance Director Subject: 2012 Comprehensive Annual Financial Report (CAFR) Staff has prepared a presentation of a consolidated version of the 2012 Comprehensive Annual Financial Report (CAFR). Dennis Hoogeveen, Principal of the audit firm CliftonLarsonAllen, LLC will be present to review the results of the 2012 audit to the City Council and public. Supporting Information • Power Point Presentation • 2012 Executive Audit Summary • 2012 Comprehensive Annual Financial Report (separate attachment due to size) EA Financial Report City of Hopkins An Overview of the 2012 Comprehensive Annual Financial Report City of Hopkins The City of Hopkins presents its Comprehensive Annua Financial Report This presentation 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 Economic Condition • Valuation of new non-residential construction was $6.8 million in 2012. it There remains an viable economic development and redevelopment market within the City of Hopkins. vm An additional $130 million of construction is projected over the next several years. Significant Projects in 2012 a Marketplace & Main $8.4 million 0 a Mayon Plastics site redevel. $3.0 million e BP Gas Station site redevel. $4.0 million 2 a Future Projects Hopkins Cold Storage $62 million Marketplace & Main Townhomes $ 2 million 5th Avenue Flats $40 million 8th Avenue Redevelopment $30 million Gallery Flats Apts. $26 million Major Municipal Initiatives Street repair and improvements - $1,903,000 Utility improvement projects - $580,000 Sewer lining project - $191,000 Activity Center HVAC upgrade - $246,100 Maetzold Field Improvements - $224,200 Valley Park Playground - $34,630 Art Center flooring upgrades - $15,000 Conversion of large commercial water meters to radio read " system. .. 1 1 Financial Highlights Assets exceeded liabilities by approximately $67.1 million — About 72% is capital assets ($48 m) — $10.1 million can be used for ongoing obligations ■ Governmental funds fund balances totaled $18.6 million, an decrease of $3.6 million ■ Unreserved fund balance of the General Fund totaled $4.5 million or 42.7% of expenditures ■ Debt increased $2.3 million due to the 2013 bond sale for capital expenditures. Financial Highlights - cont ■ Governmental Activities — Property tax revenues increased as a result of debt levies and increased operating costs. — Program grants were received for specific programs ■ Business Type Activities — Charges for service increased due to scheduled rate increases per the Utility Master Plan ® — Program grants increased • COPS, Fire, HRA Revenues and Other Financing Sources by Fund Type W Internal 0 Enterprise Service $6,495,263 $842,791 General $10,668,657 12 Debt $9,1156,83 ■ Special Revenue D Capital $5,175,353 $5,025,394 Expenditures and Other Financing Uses by Fund Type Internal Ser% ice Enterprise $494,592 $5.634.4911 General $10,506,725 Debt $8.714.412__ Special ---------Rcventje Capital $4,377,184 $2,771,306 Statement of Net Assets (in thousands) 2012 2011 2011 Assets -Property taxes and special assessments $12,687 -Cash and short-term investments $23,557 $15,952 1,174 -Operating grants &contributions -Taxes &special assessments receivable 5,396 5,789 1,350 1,751 -Other receivables 1,013 1,048 -Other revenues 290 -Other assets and debits 69,528 69,753 $18,051 Expenditures -Deferred Outflows 387 0 $2,057 ■ Total Assets $ 99,880 $ 92,542 -Highways &streets 3,227 Liabilities -Culture &recreation 1,727 1,645 -Other expenditures -Accounts payable $ 1,514 $ 647 812 872 -Accrued compensation 405 396 Change in Net Assets $ 2,165 -Other liabilities 462 467 -Long term liabilities 30,403 26,960 Total Liabilities $32,782 $28,470 Total Net Assets $67,098 $64,072 Statement of Activities Governmental Fund Types, (in thousands) 2012 2011 Revenues -Property taxes and special assessments $12,687 $12,192 -Charges for service 1,021 1,174 -Operating grants &contributions 3,499 2,325 -Capital grants &contributions 1,350 1,751 -Grants &contributions not restricted 21 313 -Other revenues 290 296 Total Revenues $18,868 $18,051 Expenditures -General government $2,057 $1,720 -Public safety 6,382 6,214 -Highways &streets 3,227 3,332 -Culture &recreation 1,727 1,645 -Other expenditures 2,498 Statement of Activities Governmental Fund Types, (in thousands) 2012 2011 Revenues -Property taxes and special assessments $12,687 $12,192 -Charges for service 1,021 1,174 -Operating grants &contributions 3,499 2,325 -Capital grants &contributions 1,350 1,751 -Grants &contributions not restricted 21 313 -Other revenues 290 296 Total Revenues $18,868 $18,051 Expenditures -General government $2,057 $1,720 -Public safety 6,382 6,214 -Highways &streets 3,227 3,332 -Culture &recreation 1,727 1,645 -Other expenditures 2,498 3,029 -Interest on long term debt 812 872 Total Expenditures $16,703 $16,812 Change in Net Assets $ 2,165 $ 1,239 Statcmcnt ole Activitics Proprietary Fund Types, (in thousands) 2012 2011 Revenues —Charges for services 85.572 $5.618 —Operating grants &contributions 699 190 —Capital grants &contributions 207 28 —Other revenues 17 36 Total Revenues and Other Sources $6,495 $5,872 Expenditures —Water 81.365 81.264 —Sewer 1.816 1.800 —Storm sewer 452 407 —Refuse 862 778 —Pavilion/Ice Arena 430 416 —Housing &Redevelopment Authority 564 607 —Transfers 145 145 Total Expenditures and Other Uses $5,634 $5,417 Excess Revenues over Expenditures $ 861 $ 455 Proprietary Fund Types, (in thousands) 2012 2011 Revenues —Charges for services 85.572 $5.618 —Operating grants &contributions 699 190 —Capital grants &contributions 207 28 —Other revenues 17 36 Total Revenues and Other Sources $6,495 $5,872 Expenditures —Water 81.365 81.264 —Sewer 1.816 1.800 —Storm sewer 452 407 —Refuse 862 778 —Pavilion/Ice Arena 430 416 —Housing &Redevelopment Authority 564 607 —Transfers 145 145 Total Expenditures and Other Uses $5,634 $5,417 Excess Revenues over Expenditures $ 861 $ 455 Fund Equity Fund Balance/ IL Fund Type Equity Incr/(Deer) General Fund $ 5,194,143 $ 161,932 Special Revenue Funds $ 3,917,946 $ 798,169 Capital Project Funds $ 4,868,618 $2,254,088 Debt Service funds $ 4,618,138 $ 342 421 Enterprise Funds $18,667,731 $ 860,773 Internal Service Funds $ 3,986,420 $ 348,199 7 CAFR — Changes in Reporting In 2012 we implemented GASB No. 63 — Changed the title of the balance sheet to "Statement of Net Position". — Fund balance is now show as "Net Assets" — Changed Deferred Charges to "Deferred Outflows" which is a consumption of net assets applicable to a future period. — Changed Deferred Revenue to "Deferred Inflows" which is an acquisition of net assets applicable to a future period. M CITY OF HOPKINS EXECUTIVE AUDIT SUMMARY (EAS) DECEMBER 31, 2012 CITY OF HOPKINS TABLE OF CONTENTS DECEMBER 31, 2012 AUDIT REPORT SUMMARY FINANCIAL RESULTS GOVERNMENT -WIDE FINANCIAL STATEMENTS GENERALFUND ENTERPRISE FUNDS APPENDIX A FORMAL REQUIRED COMMUNICATIONS APPENDIX B 2 4 5 6 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 APPENDIX C AUDITORS' REPORT ON LEGAL COMPLIANCE 14 pCI ron'_arson,Allen LIP:''.4Sti:'�.'.i;l i`tonlarsonalen.crm CliftonLarsonAllen 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, 2012. 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 "unqualified" audit opinion. Yellow Book Opinion Our report on internal control over financial reporting noted two material weaknesses. Legal Compliance No compliance issues were reported with respect to Minnesota Statutes. Significant Reporting Changes from Prior Year The City changed accounting policies related by adopting Statement of Governmental Accounting Standards (GASB Statement) No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30. 1989 FASB and AICPA Pronouncements, GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position, and GASB 65, Items Previously Reported as Assets and Liabilities, in 2012. Upon adoption of GASBS 62, all governmental accounting guidance is codified into the GASB literature. GASBS 63 provides guidance on deferred outflows and inflows of resources. It also renames the residual amounts from "net assets" to "net position". GASBS 65 establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities. The most significant impact of the adoption of this standard is the reclassification of delinquent taxes and deferred special assessment deferred revenue to deferred inflows, the reclassification of deferred amounts from refunding of debt to deferred outflows and the write-off of debt issuance costs, which are no longer deferred at all. A J�ndeN —, _ _ . . ( 1 FINANCIAL RESULTS 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 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, net investment in capital assets 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 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, 2012: Governmental Business -Type Activities Activities Assets: Current Assets $ 28,357,723 $ 2,937,340 Capital Assets 47,524,794 21,060,724 Total Assets 75,882,517 23,998,064 Liabilities: Current Liabilities 2,079,463 300,911 Long -Term Liabilities 25,372,537 5,029,422 Total Liabilities 27,452,000 5,330,333 Net Assets: Net Investment in Capital Assets 31,891,229 16,405,495 Restricted 8,684,347 - Unrestricted 7,854,941 2,262,236 Total Net Position $ 48,430,517 $ 18,667,731 Total $ 31,295,063 68,585,518 99,880,581 2,380,374 30,401,959 32,782,333 48,296,724 8,684,347 10,117,177 $ 67,098,248 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). (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 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, 2012: 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 Total Governmental and Business -Type Activities Expenses Program Revenue $ 2,056,756 6,382,270 136,528 3,226,807 2,362,030 1,726,812 811,914 16, 703,117 1,365,542 1,816,058 451,659 862,286 430,082 563,863 5,489,490 $ 22,192,607 $ 1,269,668 1,193,818 163,539 1,444,245 870,139 929,224 5,870,633 1,534,221 2,149,955 801,345 925,082 406,767 660,093 6,477,463 $ 12,348,096 General Revenues: Property Taxes Tax Increments Grants and Contributions, Not Restricted Unrestricted Investment Earnings Gain on Disposal of Capital Assets Total General Revenues, Special Items, and Transfers Change in Net Position (3) Difference $ (787,088) (5,188,452) 27,011 (1,782,562) (1,491,891) (797,588) (811,914) (10, 832,484) 168,679 333,897 349,686 62,796 (23,315) 96,230 987,973 (9,844,511) 10,354,188 2,332,863 20,724 116,104 46,427 12,870,306 $ 3,025,795 GENERALFUND 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 $8,721,264 for 2012. 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, $9,000,000 $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 6m- 6m- 2008 2009 2010 2011 2012 ❑ 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 $5,988,798 for 2012. $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 General Fund Expenditures by Function Years Ended December 31, 2008 2009 2010 2011 2012 ❑ General Governmental ■ Public Safety O Health & Welfare ❑ Highways & Streets ■ Culture & Recreation M Capital Outlay Urban redevelopment and housing (4) GENERAL FUND (CONTINUED) Fund Balance — Total fund balance of the City's General Fund increased by $161,932 during fiscal 2012, from $5,032,211 to $5,194,143 at December 31, 2012. 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, 2012, the unassigned fund balance as a percentage of annual expenditures is 44.1% or approximately 23 weeks of expenditures. This compares to 41.9% and approximately 22 weeks of expenditures as of December 31, 2011. 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 $112,132 (or 1.1%) higher than the budgeted amount while total expenditures were $49,800 (less than 1%) less than had been budgeted. After considering operating transfers, the net effect was an increase to total fund balance that was $161,932 more than had been reflected in the City's budget. As part of any budget update initiated for fiscal 2013, 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 $18,667,731 as of December 31, 2012. The largest portion of this being an investment in infrastructure and other capital assets net of related debt in the amount of $16,405,495. (5) C IMAwk Clifton LarsonAllen APPENDIX A CliftonLarsonAllen LLP www.d iftonlarsonallen. com 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 the City of Hopkins (the City) for the year ended December 31, 2012, and have issued our report thereon dated June 27, 2013. 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 Accountinq 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. For the year ended December 31, 2012, the financial statements include the impact of adoption of Governmental Accounting Standards Board statement numbers 62, 63 and 65. GASBS 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements, supersedes GASBS 20. GASBS 20 gave governments the choice to elect to follow only GASB's authoritative literature, or to follow FASB and AICPA pronouncements that did not conflict with GASB pronouncements. Upon adoption of GASBS 62, all governmental accounting guidance is codified into the GASB literature. GASBS 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, provides guidance on deferred outflows and inflows of resources. It also renames the residual amounts from "net assets" to "net position". These financial statements include the statement of net position, which reports all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Adoption of future GASB standards will include reporting of some items previously reported as assets and liabilities as deferred outflows and inflows of resources. GASBS 65, Items previously reported as assets and liabilities, establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. 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. AnincWmndentr ter of NexisIntemet EW (6� VJ Honorable Mayor and Members of the City Council City of Hopkins Accountinq 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. 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, 2012. 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, 2012 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. 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 We encountered no significant difficulties in dealing with management in performing and completing our audit. 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. Management has determined that the effect of the uncorrected misstatement is immaterial to the financial statements taken as a whole. The following summarizes the uncorrected misstatement of the financial statements: • The City expensed approximately $189,000 of bond issuance costs that were previously deferred. Under the provisions of GASB 65, these costs are no longer deferred and should be deducted from net position as a prior period adjustment. Passing on this adjustment and expensing these costs resulted in an understatement of change in net position of approximately $189,000, and an overstatement of beginning net position of approximately $189,000. Corrected misstatements None of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole. (7) Honorable Mayor and Members of the City Council City of Hopkins Disagreements with management For purposes of this letter, a disagreement with management 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 27, 2013. 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. 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 City's auditors. However, these discussions occurred in the normal course of our, professional relationship and our responses were not a condition to our engagement. Other audit findings or issues We have provided a separate letter to you dated June 27, 2013 at Appendix B, communicating internal control related matters identified during the audit. Audits of group financial statements We noted no matters related to the group audit that we consider to be significant to the responsibilities of those charged with governance of the group. 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 provide sufficient evidence, we did not express an opinion or provide any assurance on the RSI. a Honorable Mayor and Members of the City Council City of Hopkins With respect to the Combining and individual fund statements and Information for a Comprehensive Annual Financial Report (CAFR) (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 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 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 have issued our report thereon dated June 27, 2013. Other information is being included in documents containing the audited financial statements and the auditors' report thereon. Our responsibility for such other information does not extend beyond the financial information identified in our auditors' report. We have no responsibility for determining whether such other information is properly stated and do not have an obligation to perform any procedures to corroborate other information contained in such documents. As required by professional standards, we read the Statistical data and Introductory Section (the other information) in order to identify material inconsistencies between the audited financial statements and the other information. We did not identify any material inconsistencies between the other information and the audited financial statements. This communication is intended solely for the information and use of the 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. Clifton LarsonAllen LLP Minneapolis, Minnesota June 27, 2013 I[a CliftonLarsonAllen LLP wmvdi tonlarsonallen.com CliftonLarsonAllen 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 (the City), as of and for the year ended December 31, 2012, 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 27, 2013. 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 identified certain deficiencies in internal control that we consider to be material weaknesses. 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 findings 2012-01 and 2012-02 to be material weaknesses. I,�II.R�, �l\� \I. Honorable Mayor and Members of the City Council City of Hopkins 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. City of Hopkins's Responses to Findings City of Hopkins'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 entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. CliftonLarsonAllen LLP Minneapolis, Minnesota June 27, 2013 Honorable Mayor and Members of the City Council City of Hopkins SCHEDULE OF FINDINGS AND RESPONSES 2012-01 Material Weakness — Segregation of Duties over Payroll Condition: The City's Senior Finance Clerk enters and processes payroll and also has access to entering pay rate changes and adding employees. In addition, there is not a formal, independent review process over payroll changes that entails a detailed review for proper payroll changes each pay period. Criteria: Management is responsible for establishing and maintaining internal controls over the processing and review of payroll transactions. They are responsible for monitoring the activity and to ensure that only authorized payments are made. Effect: The Senior Finance Clerk could process a payment to a fictitious employee or for an unauthorized rate without detection. Cause: The Senior Finance Clerk has been entrusted with access to make changes and to process payroll appropriately. The City has relied upon budgetary spending reviews to detect any improper spending through payroll, as opposed to implementing a formal, independent review process. Recommendation: To segregate the duties over payroll, no employee should have access to both process payroll and also make employee changes (pay rate, add employees). We recommend that access to make employee changes be restricted to employees in Human Resources (HR) who do not have access to processing payroll. However, some organizations do not deem this segregation of duties to be practical or efficient, so if the City does not want to restrict the Senior Finance Clerk's access to these two function areas, we recommend that a knowledgeable employee independent of payroll processing review the processed payroll registers each pay period and compare them to the approved Personnel Action Forms (PAF's) for the period. This review is best done by someone in HR who processes employee changes. Management's Response: We are looking into the payroll process and the available personnel to determine how we can mitigate this risk and improve internal controls over payroll. We will likely follow the second part of your recommendation and determine that the best way to mitigate this risk is to have an HR employee run a payroll change report each pay period and review it for properly approved changes to employees and wages. We will formalize these procedures when they are approved. 2012-02 Material Weakness — Segregation of Duties over Investments Condition: The City's Finance Director makes investment decisions, processes all investment transfers and records them through journal entries. Another employee reviews the journal entries that record investment activity, but they do not utilize the supporting investment statements during their review to determine if all entries are proper and that no inappropriate transfers were made and not recorded. Criteria: Management is responsible for establishing and maintaining internal controls over the processing and review of investment and transfer transactions. They are responsible for monitoring the activity and to ensure that only authorized investment activity occurs. Effect: The Finance Director could process an inappropriate investment or electronic transfer of City funds without detection. Another employee may not detect if City funds were inappropriately transferred to an outside bank account. (12) Honorable Mayor and Members of the City Council City of Hopkins 2012-02 Material Weakness — Segregation of Duties over Investments (Continued) Cause: The Finance Director has been entrusted with processing and overseeing investment activity on the City's behalf. The City has relied upon a summary review of journal entries and financial reports to oversee investment activity that is processed, as opposed to implementing a formal, independent review process. Recommendation: To segregate the duties over investments, no employee should have access to process investment transactions and also be the only one overseeing the investment balances and activity on the statements. We recommend that each month, when the Senior Finance Clerk is reconciling the general checking account, they trace out all investment transfers and significant activity to the related bank and investment statements. Most of the City's funds are with Wells Fargo and the Senior Finance Clerk already has access to those statements online. For other investment accounts, they should be given login access to review monthly activity. This will not only help them perform a more substantial and effective review of the Finance Director's recorded investment entries, but will also provide for a more effective control over transfers made to non -City accounts. This monthly review of all City accounts and transfers by the Senior Finance Clerk should be documented. Management's Response: We agree with this additional review procedure to mitigate this risk and improve internal controls over investments and electronic transfers. We will formalize these procedures when they are approved and implemented. (13) 4 1 W ll-gir CliftonLarsonAllen APPENDIX C CliftonLarsonAllen LLP www.diftonlarsonallen.com AUDITORS' REPORT ON 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, 2012, 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 27, 2013. The Minnesota Legal Compliance Audit Guide for Political Subdivisions promulgated by the State Auditor pursuant to Minn. Stat. § 6.65, identifies seven categories of compliance to be tested in connection with the audit of a City's financial statements: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. In connection with our audit, nothing came to our attention that caused us to believe that the City of Hopkins failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions. 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. 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 Political Subdivisions and the results of that testing, and not to provide an opinion on the effectiveness of the City's compliance. Accordingly, this communication is not suitable for any other purpose. LLQ CliftonLarsonAllen LLP Minneapolis, Minnesota June 27, 2013 A,,-.-Menl --,I N.— l nterratrorel (1 4 )