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9.a) 2014 Audited Financial Statements - FinalCITY OF SCANDIA, MINNESOTA AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2014 SCHLENNER WENNER & CO. Certified Public Accountants & Business Consultants CITY OF SCANDIA, MINNESOTA TABLE OF CONTENTS INTRODUCTORY SECTION: CITY COUNCIL AND OFFICIALS................................................................................................................................1 FINANCIAL SECTION: INDEPENDENT AUDITORS' REPORT.........................................................................................................................2 REQUIRED SUPPLEMENTARY INFORMATION: Management's Discussion and Analysis........................................................................................................................4 BASIC FINANCIAL STATEMENTS: Government -wide Financial Statements Statementof Net Position..................................................................................................................................... l l Statementof Activities.........................................................................................................................................12 Fund Financial Statements Balance Sheet -Governmental Funds..................................................................................................................... 13 Reconciliation of the Balance Sheet -Governmental Funds to the Statement of Net Position.................................................................................................................... 14 Statement of Revenues, Expenditures, and Changes in Fund Balances -Governmental Funds..........................................................................................15 Reconciliation of Changes in Fund Balance of Governmental Funds to the Statement of Activities..............................................................................................................16 Statement of Net Position -Proprietary Funds.......................................................................................................17 Statement of Revenues, Expenses, and Changes in Net Position -Proprietary Funds..................................................................................................18 Statement of Cash Flows -Proprietary Funds........................................................................................................19 Statement of Fiduciary Net Position.....................................................................................................................20 Notes to the Basic Financial Statements......................................................................................................................21 REQUIRED SUPPLEMENTARY INFORMATION: Budgetary Comparison Schedule -General Fund.......................................................................................................... 39 OTHER SUPPLEMENTARY INFORMATION: Combining Balance Sheet-Nonmajor Governmental Funds........................................................................................ 40 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances-Nommajor Governmental Funds................................................................................ 41 Supplemental Combining Balance Sheet -Debt Service Fund......................................................................................42 Supplemental Combining Schedule of Revenues, Expenditures, and Changes in Fund Balance -Debt Service Fund...................................................................................................... 43 OTHER REPORTS: 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.......................................................................................................................... 44 Schedule of Findings and Responses........................................................................................................................... 46 Independent Auditors' Report on Minnesota Legal Compliance................................................................................. 48 INTRODUCTORY SECTION CITY OF SCANDIA, MINNESOTA CITY COUNCIL AND OFFICIALS FOR THE YEAR ENDED DECEMBER 31, 2014 CITY COUNCIL Randall Simonson Mayor Dan Lee Council Member Chris Ness Council Member Jim Schneider Council Member Sally Swanson Council Member CITY OFFICIALS Kristina Handt City Administrator Colleen Firkus Treasurer Term Expires January 1, 2015 January 1, 2017 January 1, 2017 January 1, 2015 January 1, 2015 FINANCIAL SECTION SCHLENNER WENNELt&Q0. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT March 24, 2015 Honorable Mayor and City Council City of Scandia Scandia, Minnesota Report on the Financial Statements 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 Scandia, Minnesota, as of and for the year ended December 31, 2014, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. 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 ofthe United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the City's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe City's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. An Independently Owned Member, McGladrey Alliance St. Cloud Little Falls Albany Maple Lake Monticello 630 Roosevelt Rd. Ste. 201 109 E. Broadway 115 6th St. 220 Hwy. 55 North, Ste. 4 114 W. 3rd St. P.O. Box 1496 P.O. Box 365 P.O. Box 268 P.O. Box 385 P.O. Box 755 St. Cloud, MN 56302 Little Falls, MN 56345 Albany, MN 56307 Maple Lake, MN 55358 Monticello, MN 55362 320.251.0286 320.632.6311 320.845.2940 320.963.5414 763.295.5070 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Scandia, Minnesota, as of December 31, 2014, and the respective changes in financial position, and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and budgetary comparison information as shown in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The introductory section, combining and individual nonmajor fund financial statements, and supplementary combining debt service fund schedules are presented for the purposes of additional analysis and are not a required part of the basic financial statements. The introductory section, combining and individual nonmajor fund financial statements, and supplementary combining debt service fund schedules have not been subject to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 24, 2015 on our consideration of the City of Scandia's internal control over financial reporting and 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Scandia's internal control over financial reporting and compliance. Report on Other Legal and Regulatory Requirements In accordance with Minnesota Statutes, we have also issued our report dated March 24, 2015, on our consideration of City of Scandia's compliance with provisions of the Minnesota Legal Compliance Audit Guide forPolitical Subdivisions, promulgated by the State Auditor pursuant to Minnesota Statute Section 6.65. The purpose of the report is to determine if the City has complied with Minnesota laws and regulations. That report is an integral part of an audit performed in the State of Minnesota. SCHLENNER WENNER & CO. St. Cloud, Minnesota REQUIRED SUPPLEMENTARY INFORMATION CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 Our discussion and analysis of the City of Scandia's financial performance provides an overview of the City's financial activities for the year ended December 31, 2014. Please read it in conjunction with the independent auditor's report on page two and the City's financial statements, which begin on page eleven. FINANCIAL HIGHLIGHTS The City's net position increased $493,384 compared to the prior year as a result of this year's operations. In the City's business -type activities, revenues decreased approximately $10,815 (or 10.53 percent), while operating expenses increased $29,315 (or 28.81 percent). Total cost of all of the City's programs decreased $99,395 (or 4.26 percent). The City's General Fund generated more revenue than budgeted of $131,199. Expenditures were less than budgeted by $190,277, including transfers to other funds which equaled budgeted amounts. USING THIS ANNUAL REPORT This annual report consists of series of financial statements. The Statement of Net Position and the Statement of Activities (on pages eleven and twelve) provide information about the activities of the City as a whole and present a longer-term view of the City's finances. Fund financial statements start on page thirteen. For governmental activities, these statements tell how these services were financed in the short term as well as what remains for future spending. Fund financial statements also report the City's operations in more detail than the government -wide statements by providing information about the City's most significant funds. The remaining statements provide financial information about activities for which the City acts solely as an agent for the benefit of those outside of the government. Reporting the City as a Whole Our analysis of the City as a whole begins on the following page. One of the most important questions asked about the City's finances is, "Is the City as a whole better off or worse off as a result of the year's activities?" The Statement of Net Position and the Statement of Activities report information about the City as a whole and about its activities in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private -sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report the City's net position and changes net position. You can think of the City's net position (the difference between assets and liabilities) as one way to measure the City's financial health, or financial position. Over time, increases or decreases in the City's net position are one indicator of whether its financial health is improving or deteriorating. You will need to consider other nonfinancial factors, however, such as changes in the City's property tax base and the condition of the City's roads, to assess the overall health of the City. In the Statement of Net Position and the Statement of Activities, we divide the City into two kinds of activities: Governmental Activities — Most of the City's basic services are reported here, including law enforcement, fire, public works, parks departments, and general administration. Property taxes, special assessments, licenses, permits and fees, and state aids finance most of these activities. Business -type Activities — The City charges a fee to customers to help it cover all or most of the cost of certain services it provides. The City's 201 sewer and uptown sewer systems are reported here. 4 CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 USING THIS ANNUAL REPORT (Continued) Reporting the City's Most Significant Funds Our analysis of the City's major funds begins on page seven. The fund financial statements begin on page thirteen and provide detailed information about the most significant funds -not the City as a whole. Some funds are required to be established by State law and by bond covenants. However, the City Council may establish other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money. The City's three kinds of funds (governmental, proprietary, and fiduciary) use different accounting approaches. Governmental Funds — Most of the City's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view ofthe City's general government operations and the basic services it provides. Governmental fund information helps you determine whether there are more or fewer financial resources that can be spent in the near future to finance the City's programs. We describe the relationship (or differences) between governmental activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds in reconciliations following the fund financial statements. Proprietary Funds — When the City charges customers for the services it provides these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Position and the Statement of Activities. In fact, the City's enterprise funds are the same as the business -type activities we report in the government -wide statements but provide more detail and additional information, such as cash flows, for proprietary funds. Fiduciary Fund — This fund is used to account for resources held for the benefit of parties outside ofthe City. Accounting for fiduciary funds is much like that used for proprietary funds. THE CITY AS A WHOLE The City's combined net position increased $493,384 from a year ago. Our analysis below focuses on the net position (Table 1) and changes in net position (Table 2) of the City's governmental and business -type activities. Current & Other Assets Net Capital Assets Total Assets Current & Other Liabilities Long -Tenn Debt Outstanding Total Liabilities Net Position: Net Investment in Capital Assets Restricted Unrestricted Total Net Position Table 1 Net Position Governmental Activities 2014 2013 Business -Type Activities 2014 2013 Total Government 2014 2013 $ 3,478,568 $ 3,071,252 $ 132,766 $ 153,969 $ 3,611,334 $ 3,225,221 8,970,406 9,143,882 971,176 985,013 9,941,582 10,128,895 12,448,974 12,215,134 1,103,942 1,138,982 13,552,916 13,354,116 188,162 191,862 5,727 1,611 193,889 193,473 1,030,000 1,325,000 - - 1,030,000 1,325,000 1,218,162 1,516,862 5,727 1,611 1,223,889 1,518,473 7,940,406 7,818,882 971,176 985,013 8,911,582 8,803,895 580,833 767,135 - - 580,833 767,135 2,709,573 2,112,255 127,039 152,358 2,836,612 2,264,613 $ 11,230,812 $ 10,698,272 $ 1,098,215 $ 1,137,371 $ 12,329,027 $ 11,835,643 CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 THE CITY AS A WHOLE (Continued) The net position of the City's governmental activities increased by $532,540 (or 4.98 percent). Unrestricted net position (the part of net position that can be used to finance day-to-day operations without constraints established by debt covenants, enabling legislation, or other legal requirements) increased by $597,318 (or 28.28 percent) compared to the prior year. The net position of the City's business -type activities decreased by $39,156 (or 3.44 percent). Operations were comparable to the prior year. Table 2 Changes in Net Position Change in Net Position $ 532,540 $ 413,056 $ (39,156) $ (6,068) $ 493,384 $ 406,988 The City's total revenues decreased by $12,999 (or 0.47 percent), largely due to a decrease in charges for services offset partially by various increases in other areas. The total cost of all programs and services decreased by $99,395 (or 4.26 percent), primarily due to costs incurred in the prior year for the completion of an environmental study to determine the impact of opening a local mine. Our analysis below separately considers the operations of governmental and business -type activities: Governmental Activities Revenue for the City's governmental activities decreased $2,184 (or 0.08 percent), while total expenses decreased $128,710 (or 5.77 percent). Revenues and expenses were generally consistent year to year, with the exception of decreased general government expenses, related to the matter discussed on the prior page. C Governmental Business -Type Total Activities Activities Government 2014 2013 2014 2013 2014 2013 REVENUE Charges for Services $ 327,863 $ 342,339 $ 86,187 $ 99,165 $ 414,050 $ 441,504 Grants and Contributions 51,849 42,817 5,278 3,055 57,127 45,872 Taxes 2,190,448 2,193,758 - - 2,190,448 2,193,758 Intergovernmental 19,558 20,221 - - 19,558 20,221 Investment Income 8,294 8,176 430 490 8,724 8,666 Other 35,709 28,594 - - 35,709 28,594 Total Revenues 2,633,721 2,635,905 91,895 102,710 2,725,616 2,738,615 PROGRAM EXPENSES General Government 426,431 584,423 - - 426,431 584,423 Public Safety 391,752 409,771 - - 391,752 409,771 Public Works 1,124,948 1,060,120 - - 1,124,948 1,060,120 Parks and Recreation 111,619 109,884 - - 111,619 109,884 Economic Development 240 - - - 240 - Debt Service 46,191 65,693 - - 46,191 65,693 201 Sewer - - 113,098 87,769 113,098 87,769 Uptown Sewer - - 17,953 13,967 17,953 13,967 Total Expenses 2,101,181 2,229,891 131,051 101,736 2,232,232 2,331,627 Transfers - 7,042 - (7,042) - - Change in Net Position $ 532,540 $ 413,056 $ (39,156) $ (6,068) $ 493,384 $ 406,988 The City's total revenues decreased by $12,999 (or 0.47 percent), largely due to a decrease in charges for services offset partially by various increases in other areas. The total cost of all programs and services decreased by $99,395 (or 4.26 percent), primarily due to costs incurred in the prior year for the completion of an environmental study to determine the impact of opening a local mine. Our analysis below separately considers the operations of governmental and business -type activities: Governmental Activities Revenue for the City's governmental activities decreased $2,184 (or 0.08 percent), while total expenses decreased $128,710 (or 5.77 percent). Revenues and expenses were generally consistent year to year, with the exception of decreased general government expenses, related to the matter discussed on the prior page. C CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 THE CITY AS A WHOLE (Continued) Governmental Activities (Continued) Table 3 presents the cost of each of the City's programs (general government, public safety, public works, parks and recreation, economic development, and debt service) as well as each program's net cost (total cost less revenues generated by the activities). The net cost shows the financial burden that was placed on the City's taxpayers by each of these functions. Activities, net of capital outlay which is excluded from Table 3, were generally comparable to the prior year as operations remained fairly consistent with the prior year, with the exception of the fluctuation in expenses for general government previously mentioned. Table 3 Governmental Activities Business -type Activities Revenues of the City's business -type activities (see Table 2) decreased by $10,815 (or 10.53 percent). Expenses increased by $29,315 (or 28.81 percent). THE CITY'S FUNDS Governmental Funds As the City completed the year, its governmental funds (as presented in the balance sheet on page thirteen) reported a combined fund balance of $3,183,111. This is an increase of $447,147 (or 16.34 percent) from the prior year. This increase in fund balance is the net result of a multitude of transactions, but a few of the largest contributing factors unique to the current year's operations are as follows: Revenue from building permits issued by the City exceeded budgeted amounts by $29,526. The City received escrow reimbursements of approximately $143,956 for expenditures incurred in prior years related to the Tiller Environmental Impact Statement. Revenue from donations to the City totaled $21,968, exceeding budgeted amounts by $13,968. Property tax revenues of $127,704 were recorded in the Local Road Improvement Fund, but no amounts were expended from this fund during 2014. Expenditures for planning and buildings services were $99,315 less than budgeted. During 2014, the City began offsetting these contracted expenditures with the related revenues, resulting in this variance from budgeted amounts. Expenditures related to the general operations of the fire department were $48,266 less than budgeted. Expenditures for various other City departments were less than budgeted. Other operations were comparable to the prior year, with the exception of the issuance of the 2013 equipment certificates and significant capital outlay expenditures incurred in the prior year. Financial information specific to the governmental funds is detailed in Table 4. Such information was derived from the fund financials at pages thirteen and fifteen. Total Cost Net Cost of Services of Services 2014 2013 2014 2013 General Government $ 426,431 $ 584,423 $ 170,535 $ 307,960 Public Safety 391,752 409,771 326,332 341,601 Public Works 1,124,948 1,060,120 1,109,093 1,041,195 Parks and Recreation 111,619 109,884 69,078 88,286 Economic Development 240 - 240 - Debt Service 46,191 65,693 46,191 65,693 Totals $ 2,101,181 $ 2,229,891 $ 1,721,469 $ 1,844,735 Business -type Activities Revenues of the City's business -type activities (see Table 2) decreased by $10,815 (or 10.53 percent). Expenses increased by $29,315 (or 28.81 percent). THE CITY'S FUNDS Governmental Funds As the City completed the year, its governmental funds (as presented in the balance sheet on page thirteen) reported a combined fund balance of $3,183,111. This is an increase of $447,147 (or 16.34 percent) from the prior year. This increase in fund balance is the net result of a multitude of transactions, but a few of the largest contributing factors unique to the current year's operations are as follows: Revenue from building permits issued by the City exceeded budgeted amounts by $29,526. The City received escrow reimbursements of approximately $143,956 for expenditures incurred in prior years related to the Tiller Environmental Impact Statement. Revenue from donations to the City totaled $21,968, exceeding budgeted amounts by $13,968. Property tax revenues of $127,704 were recorded in the Local Road Improvement Fund, but no amounts were expended from this fund during 2014. Expenditures for planning and buildings services were $99,315 less than budgeted. During 2014, the City began offsetting these contracted expenditures with the related revenues, resulting in this variance from budgeted amounts. Expenditures related to the general operations of the fire department were $48,266 less than budgeted. Expenditures for various other City departments were less than budgeted. Other operations were comparable to the prior year, with the exception of the issuance of the 2013 equipment certificates and significant capital outlay expenditures incurred in the prior year. Financial information specific to the governmental funds is detailed in Table 4. Such information was derived from the fund financials at pages thirteen and fifteen. CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 THE CITY'S FUNDS (Continued) Governmental Funds (Continued) Table 4 General, Special Revenue, Debt Service, and Capital Project Funds Information Based on Fund Financials Total Assets Total Liabilities Deferred Inflows of Resources Total Revenues Total Expenditures Debt Service Included in Total Expenditures Capital Outlay Included in Total Expenditures Bond Proceeds Net Transfers Total Assets Total Liabilities Total Revenues Total Expenditures Capital Outlay Included in Total Expenditures Proceeds on Sale of Asset Net Transfers Total Assets Total Liabilities Deferred Inflows of Resources Total Revenues Total Expenditures Debt Service Included in Total Expenditures Capital Outlay Included in Total Expenditures Bond Proceeds Proceeds on Sale of Asset Net Transfers General Fund 2014 $ 1,917,489 $ 150,230 $ 51,369 $ 2,070,197 $ 1,648,722 2013 $ 1,819,453 $ 163,323 $ 61,715 $ 2,163,395 $ 1,805,675 Debt Service Fund 2014 $ 444,627 $ 435 $ 93,423 $ 349,636 $ 336,543 7013 $ 446,826 $ 109,150 $ 390,852 $ 547,639 $ - $ - $ 336,543 $ 547,639 $ - $ 63,871 $ - $ - $ - $ - $ - $ 570,000 $ (300,000) $ (92,858) $ - $ (544,454) Capital Projects Funds ?014 ?0111 $ 1,115,692 $ 227,561 $ 227,142 $ 226,013 $ 11,400 $ 300,000 $ 804,973 $ 1,100 $ 92,679 $ 388,020 $ 386,570 $ 5,905 $ 644,354 Total Governmental Funds 2014 $ 3,478,568 $ 150,665 $ 144,792 $ 2,648,394 $ 2,212,647 701 11 $ 3,071,252 $ 164,423 $ 170,865 $ 2,646,926 $ 2,741,334 $ 336,543 $ 547,639 $ 226,013 $ 450,441 $ - $ 570,000 $ 11,400 $ 5,905 $ - $ 7,042 Revenue Fund 2014 $ 760 $ 1,000 $ 240 ?n VI 8 CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 THE CITY'S FUNDS (Continued) General Fund Budgetary Highlights The City's General Fund generated more revenue than budgeted of $131,199. Expenditures were less than those budgeted by $190,277. See additional detail pertaining to differences between budgeted and actual amounts within the General Fund previously discussed on page seven and at the Budgetary Comparison Schedule on page thirty-nine. Proprietary Funds Financial information specific to the proprietary funds is detailed in Table 5. Such information was derived from the fund financials at pages seventeen and eighteen. Table 5 Proprietary Fund Information Based on Fund Financials CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the end of 2014, the City had $9,941,582 invested in a broad range of capital assets, including land, buildings, equipment and vehicles, infrastructure, improvements, and sewer systems. This amount represents a net decrease of approximately $187,313 (or 1.85 percent) from last year. 201 Sewer Fund Uptown Sewer Fund 2014 2013 2014 2013 Total Assets $ 935,997 $ 972,196 $ 204,553 $ 207,114 Total Liabilities $ 3,971 $ 1,136 $ 38,364 $ 40,803 Total Revenues $ 74,064 $ 83,897 $ 17,831 $ 18,813 Total Expenditures $ 113,098 $ 87,769 $ 17,953 $ 13,967 Net Transfers $ - $ (2,972) $ - $ (4,070) Change in Net Position $ (39,034) $ (6,844) $ (122) $ 776 Total Proprietary Funds 2014 2013 Total Assets $ 1,140,550 $ 1,179,310 Total Liabilities $ 42,335 $ 41,939 Total Revenues $ 91,895 $ 102,710 Total Expenditures $ 131,051 $ 101,736 Net Transfers $ - $ (7,042) Change in Net Position $ (39,156) $ (6,068) CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the end of 2014, the City had $9,941,582 invested in a broad range of capital assets, including land, buildings, equipment and vehicles, infrastructure, improvements, and sewer systems. This amount represents a net decrease of approximately $187,313 (or 1.85 percent) from last year. CITY OF SCANDIA, MINNESOTA MANAGEMENT'S DISCUSSION AND ANALYSIS DECEMBER 31, 2014 CAPITAL ASSET AND DEBT ADMINISTRATION (Continued) Capital Assets (Continued) Table 6 Net Capital Assets at Year -End More detailed information about the City's capital assets is presented in Note 3.B. to the financial statements. Debt At year-end, the City had $1,030,000 in debt versus $1,325,000 last year (a decrease of 22.26 percent), as shown in Table 7. Table 7 Outstanding Debt at Year -End Governmental Business -Type Activities Activities '>nln 7n11 Totals 1An 7n11 1A1A 71111 General Obligation Debt $ 1,030,000 $ 1,325,000 $ - $ - $ 1,030,000 $ 1,325,000 See additional information at Note 3.C. to the financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The City's elected and appointed officials considered many factors when setting the year 2015 budget, such as tax rates and fees that will be charged for the business -type activities. Citizens were asked for feedback on how to fund road improvements. A majority favored general tax dollars rather than special assessments or franchise fees so the 2015 budget increased slightly to allocate more dollars to the Local Road Improvement Fund. For the second year, the Council elected to make no changes to the sewer rates. The Council expects operations in 2015 to remain fairly consistent with those of 2014. Overall budget amounts for 2015 are slightly higher than 2014's budget and operations mainly due to an increase in capital expenditures. CONTACTING THE CITY'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the City's finances and to show the City's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City of Scandia, 14727 2091h Street N, Scandia, MN 55073. 10 Governmental Business -Type Activities Activities Totals 2014 2013 2014 2013 2014 2013 Land $ 487,735 $ 487,735 $ - $ - $ 487,735 $ 487,735 Construction in Progress - 25,761 - - - 25,761 Buildings 1,414,369 1,423,564 - - 1,414,369 1,423,564 Equipment and Vehicles 1,130,261 1,037,192 21,039 - 1,151,300 1,037,192 Infrastructure 5,869,724 6,095,784 - - 5,869,724 6,095,784 Other Improvements 68,317 73,846 - - 68,317 73,846 201 Sewer System - - 750,000 780,000 750,000 780,000 Uptown Sewer - - 200,137 205,013 200,137 205,013 Totals $ 8,970,406 $ 9,143,882 $ 971,176 $ 985,013 $ 9,941,582 $ 10,128,895 More detailed information about the City's capital assets is presented in Note 3.B. to the financial statements. Debt At year-end, the City had $1,030,000 in debt versus $1,325,000 last year (a decrease of 22.26 percent), as shown in Table 7. Table 7 Outstanding Debt at Year -End Governmental Business -Type Activities Activities '>nln 7n11 Totals 1An 7n11 1A1A 71111 General Obligation Debt $ 1,030,000 $ 1,325,000 $ - $ - $ 1,030,000 $ 1,325,000 See additional information at Note 3.C. to the financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The City's elected and appointed officials considered many factors when setting the year 2015 budget, such as tax rates and fees that will be charged for the business -type activities. Citizens were asked for feedback on how to fund road improvements. A majority favored general tax dollars rather than special assessments or franchise fees so the 2015 budget increased slightly to allocate more dollars to the Local Road Improvement Fund. For the second year, the Council elected to make no changes to the sewer rates. The Council expects operations in 2015 to remain fairly consistent with those of 2014. Overall budget amounts for 2015 are slightly higher than 2014's budget and operations mainly due to an increase in capital expenditures. CONTACTING THE CITY'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the City's finances and to show the City's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City of Scandia, 14727 2091h Street N, Scandia, MN 55073. 10 BASIC FINANCIAL STATEMENTS The basic financial statements include integrated sets of financial statements as required by the GASB. The sets of statements include: Government -wide financial statements Fund financial statements: Governmental funds Proprietary (enterprise) funds Fiduciary Fund In addition, the notes to the financial statements are included to provide information that is essential to a user's understanding of the basic financial statements. CITY OF SCANDIA, MINNESOTA STATEMENT OF NET POSITION DECEMBER 31, 2014 ASSETS Cash and Cash Equivalents Property Taxes Receivable Assessments Receivable Accounts Receivable Prepaids Inventory Internal Balances Capital Assets: Capital Assets not Being Depreciated Capital Assets Being Depreciated (Net) TOTAL ASSETS LIABILITIES Accounts Payable Accrued Payroll, Taxes, and Benefits Accrued Interest Unearned Revenue Noncurrent Liabilities: Compensated Absences Debt Due Within One Year Debt Due After One Year TOTAL LIABILITIES NET POSITION Net Investment in Capital Assets Restricted Unrestricted TOTAL NET POSITION Governmental Business -Type Activities Activities Total $ 3,256,386 $ 153,973 $ 3,410,359 62,772 - 62,772 93,423 4,919 98,342 20,094 10,482 30,576 4,818 - 4,818 4,467 - 4,467 36,608 (36,608) - 487,735 - 487,735 8,482,671 971,176 9,453,847 12,448,974 1,103,942 13,552,916 126,792 5,727 132,519 21,229 - 21,229 8,110 - 8,110 2,644 - 2,644 29,387 - 29,387 250,000 - 250,000 780,000 - 780,000 1,218,162 5,727 1,223,889 7,940,406 971,176 8,911,582 580,833 - 580,833 2,709,573 127,039 2,836,612 $ 11,230,812 $ 1,098,215 $ 12,329,027 See accompanying notes. 11 CITY OF SCANDIA, MINNESOTA STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2014 Functions/Programs Expenses _ Governmental Activities: 19,558 General Government $ 426,431 $ Public Safety 391,752 Public Works 1,124,948 Parks and Recreation 111,619 Economic Development 240 Debt Service 46,191 _ Total Governmental Activities 2,101,181 Program Revenues Net (Expense) Revenue and Changes in Net Position Operating Capital Primary Government Charges for Grants and Grants and Governmental Business -Type Services Contributions Contributions Activities Activities Total 255,896 $ - $ - $ (170,535) $ 35,594 29,826 - (326,332) 10,342 - 5,513 (1,109,093) 26,031 16,510 - (69,078) - - - (240) - - - (46,191) _ 327,863 46,336 5,513 (1,721,469) Business -Type Activities: 201 Sewer 113,098 68,356 - 5,278 Uptown Sewer 17,953 17,831 - - Total Business -Type Activities 131,051 86,187 - 5,278 TOTALS $ 2,232,232 $ 414,050 $ 46,336 $ 10,791 General Revenues: Taxes Intergovernmental Investment Income Miscellaneous Gain on Disposal of Assets Total General Revenues CHANGE IN NET POSITION NET POSITION -BEGINNING OF YEAR NET POSITION -END OF YEAR - $ (170,535) (326,332) - (1,109,093) - (69,078) (240) (46,191) (1,721,469) (39,464) (39,464) (122) (122) (39,586) (39,586) (1,721,469) (39,586) (1,761,055) 2,190,448 - 2,190,448 19,558 - 19,558 8,294 430 8,724 24,309 - 24,309 11,400 - 11,400 2,254,009 430 2,254,439 532,540 (39,156) 493,384 10,698,272 1,137,371 11,835,643 $ 11,230,812 $ 1,098,215 $ 12,329,027 See accompanying notes. 12 CITY OF SCANDIA, MINNESOTA BALANCESHEET GOVERNMENTAL FUNDS DECEMBER 31, 2014 FUND BALANCES Nonspendable 9,285 - - 34,308 Total Restricted 135,298 350,769 9,453 Debt Equipment Nonmajor Total - - General Service Replacement Governmental Governmental 201,067 Fund Fund Fund Funds Funds 1,571,307 Total Fund Balances 1,715,890 350,769 451,023 665,429 ASSETS TOTAL LIABILITIES, DEFERRED Cash and Cash Equivalents $ 1,823,041 $ 351,201 $ 451,023 $ 631,121 $ 3,256,386 Property Taxes Receivable 62,769 3 - - 62,772 Assessments Receivable - 93,423 - - 93,423 Accounts Receivable 20,094 - - - 20,094 Prepaids 4,818 - - - 4,818 Inventory 4,467 - - - 4,467 Due from Other Fund 2,300 - - - 2,300 Advance to Other Fund - - - 34,308 34,308 TOTAL ASSETS $ 1,917,489 $ 444,627 $ 451,023 $ 665,429 $ 3,478,568 LIABILITIES Accounts Payable $ 126,357 $ 435 $ - $ - $ 126,792 Accrued Payroll, Taxes, and Benefits 21,229 - - - 21,229 Unearned Revenue 2,644 - - - 2,644 Total Liabilities 150,230 435 - - 150,665 DEFERRED INFLOWS OF RESOURCES Unavailable Revenue: Property Taxes 51,369 - - - 51,369 Special Assessments - 93,423 - - 93,423 Total Deferred Inflows of Resources 51,369 93,423 - - 144,792 FUND BALANCES Nonspendable 9,285 - - 34,308 43,593 Restricted 135,298 350,769 9,453 - 495,520 Committed - - - 430,054 430,054 Assigned - - 441,570 201,067 642,637 Unassigned 1,571,307 - - - 1,571,307 Total Fund Balances 1,715,890 350,769 451,023 665,429 3,183,111 TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND FUND BALANCES $ 1,917,489 $ 444,627 $ 451,023 $ 665,429 $ 3,478,568 See accompanying notes. 13 CITY OF SCANDIA, MINNESOTA RECONCILIATION OF THE BALANCE SHEET -GOVERNMENTAL FUNDS TO THE STATEMENT OF NET POSITION DECEMBER 31, 2014 Total fund balance for governmental funds Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets (net of accumulated depreciation of $5,331,258) used in governmental activities are not financial resources and, therefore are not reported in the funds. Other long-term assets are not available to pay for current -period expenditures and therefore are reported as unavailable revenue in the funds. Some expenses reported in the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds. Accrued Interest Compensated Absences Long-term liabilities are not due and payable in the current period and, therefore, they are not reported in the governmental funds. Debt Due Within One Year Debt Due After One Year TOTAL NET POSITION OF GOVERNMENTAL ACTIVITIES 3,183,111 8,970,406 144,792 (8,110) (29,3 87) (250,000) (780,000) $ 11,230,812 See accompanying notes. 14 CITY OF SCANDIA, MINNESOTA STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED DECEMBER 31, 2014 REVENUES Taxes Special Assessments Licenses, Permits, and Fees Intergovernmental Charges for Services Fines Investment Income Miscellaneous TOTAL REVENUES EXPENDITURES Current: General Government Public Safety Public Works Parks and Recreation Economic Development Debt Service: Principal Interest and Other Charges Capital Outlay TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES (USES) Proceeds on Sale of Assets Operating Transfers In Operating Transfers Out TOTAL OTHER FINANCING SOURCES (USES) NET CHANGE IN FUND BALANCES FUND BALANCES - BEGINNING FUND BALANCES - ENDING $ 1,650,184 $ 327,506 $ - 21,240 83,659 - 43,926 - 227,736 - 13,468 - 4,947 890 46,277 - 2,070,197 349,636 - $ 223,104 Total Debt Equipment Nonmajor Total General Service Replacement Governmental Governmental Fund Fund Fund Funds Funds $ 1,650,184 $ 327,506 $ - 21,240 83,659 - 43,926 - 227,736 - 13,468 - 4,947 890 46,277 - 2,070,197 349,636 - $ 223,104 $ 2,200,794 - - 21,240 - - 83,659 - - 43,926 - 3,000 230,736 - - 13,468 1,313 1,144 8,294 - - 46,277 1,313 227,248 2,648,394 411,615 - - - 411,615 336,313 - - - 336,313 798,551 - - 1,129 799,680 102,243 - - - 102,243 - - - 240 240 - 295,000 - - 295,000 - 41,543 - - 41,543 - - 190,048 35,965 226,013 1,648,722 336,543 190,048 37,334 2,212,647 421,475 13,093 (188,735) 189,914 435,747 - - 11,400 - 11,400 - - 100,000 200,000 300,000 (300,000) - - - (300,000) (300,000) - 111,400 200,000 11,400 121,475 13,093 (77,335) 389,914 447,147 1,594,415 337,676 528,358 275,515 2,735,964 $ 1,715,890 $ 350,769 $ 451,023 $ 665,429 $ 3,183,111 See accompanying notes. 15 CITY OF SCANDIA, MINNESOTA RECONCILIATION OF CHANGES IN FUND BALANCE OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2014 Net change in fund balances - total governmental funds Amounts reported for governmental activities in the Statement of Activities are different due to the following: Governmental funds report capital outlays as expenditures while governmental activities report depreciation expense to allocate those expenditures over the life of the assets: Capital Outlay Depreciation Expense Revenues in Statement of Activities that do not provide current financial resources are not reported as revenues in the funds: Change in Long-term Receivables Proceeds from the issuance of long-term debt is an other financing source in the governmental funds, while repayment of debt principal is an expenditure in the governmental funds. However, neither transaction has any effect on net position: Bond Payments Net change in accrued interest on bonds is not reported as an expenditure in the funds: Some expenses reported in the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds: Change in Accrued Compensated Absences CHANGE IN NET POSITION OF GOVERNMENTAL ACTIVITIES $ 226,013 (399,489) 447,147 (173,476) (26,073) 295,000 (4,648) (5,410) $ 532,540 See accompanying notes. 16 CITY OF SCANDIA, MINNESOTA STATEMENT OF NET POSITION PROPRIETARY FUNDS DECEMBER 31, 2014 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable Assessments Receivable Total Current Assets Noncurrent Assets Capital Assets Being Depreciated (Net) TOTAL ASSETS LIABILITIES Current Liabilities Accounts Payable Due to Other Funds Total Current Liabilities Noncurrent Liabilities Advance from Other Funds TOTAL LIABILITIES NET POSITION Net Investment in Capital Assets Unrestricted TOTAL NET POSITION 201 Sewer Uptown Sewer Fund Fund Totals $ 153,877 $ 6,162 4,919 164,958 96 $ 153,973 4,320 10,482 - 4,919 4,416 169,374 771,039 200,137 971,176 935,997 204,553 1,140,550 3,971 1,756 5,727 2,300 2,300 3,971 4,056 8,027 34,308 34,308 3,971 38,364 42,335 771,039 200,137 971,176 160,987 (33,948) 127,039 $ 932,026 $ 166,189 $ 1,098,215 See accompanying notes. 17 CITY OF SCANDIA, MINNESOTA STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2014 201 Sewer Uptown Sewer OPERATING REVENUES Charges for Services $ 68,356 $ 17,831 $ 86,187 OPERATING EXPENSES Wages and Benefits 19,512 5,739 25,251 Materials and Supplies 2,767 9 2,776 Professional Services 5,484 199 5,683 Repairs and Maintenance 44,500 4,571 49,071 Other Services and Charges 10,599 2,559 13,158 Depreciation 30,236 4,876 35,112 TOTAL OPERATING EXPENSES 113,098 17,953 131,051 NET OPERATING LOSS (44,742) (122) (44,864) NONOPERATING INCOME Special Assessments 5,278 - 5,278 Investment Income 430 - 430 TOTAL NONOPERATING INCOME 5,708 - 5,708 CHANGE IN NET POSITION (39,034) (122) (39,156) NET POSITION -BEGINNING OF YEAR 971,060 166,311 1,137,371 NET POSITION -END OF YEAR $ 932,026 $ 166,189 $ 1,098,215 See accompanying notes. 18 CITY OF SCANDIA, MINNESOTA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED DECEMBER 31, 2014 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments to Capital Improvement Fund - (2,640) (2,640) Purchases of Capital Assets (21,275) - (21,275) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES 201 Sewer Uptown Sewer (23,915) CASH FLOW FROM INVESTING ACTIVITIES Fund Fund Totals Investment Income 430 - CASH FLOWS FROM OPERATING ACTIVITIES Net Increase (Decrease) in Cash and Cash Equivalents (21,673) 96 Cash Received from Customers $ 74,154 $ 15,612 $ 89,766 Cash Paid to Suppliers (60,515) (6,057) (66,572) Cash Paid to Employees (19,512) (5,739) (25,251) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (5,873) 3,816 (2,057) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES (44,742) $ (122) $ (44,864) Special Assessments 5,045 - 5,045 Net Advances to/from Other Funds - (1,080) (1,080) Cash Flows Reported in Other Categories: NET CASH PROVIDED (USED) BY NONCAPITAL Depreciation Expense 30,236 4,876 FINANCING ACTIVITIES 5,045 (1,080) 3,965 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments to Capital Improvement Fund - (2,640) (2,640) Purchases of Capital Assets (21,275) - (21,275) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (21,275) (2,640) (23,915) CASH FLOW FROM INVESTING ACTIVITIES Investment Income 430 - 430 Net Increase (Decrease) in Cash and Cash Equivalents (21,673) 96 (21,577) Cash and Cash Equivalents -Beginning of Year 175,550 - 175,550 Cash and Cash Equivalents -End of Year $ 153,877 $ 96 $ 153,973 RECONCILIATION OF NET OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net Operating Loss $ (44,742) $ (122) $ (44,864) Adjustments to Reconcile Net Operating Loss to Net Cash Provided by Operating Activities Cash Flows Reported in Other Categories: Depreciation Expense 30,236 4,876 35,112 Change in Assets and Liabilities: Accounts Receivable 5,798 (2,219) 3,579 Accounts Payable 2,835 1,281 4,116 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (5,873) $ 3,816 $ (2,057) See accompanying notes. 19 CITY OF SCANDIA, MINNESOTA STATEMENT OF FIDUCIARY NET POSITION FIDUCIARY FUND DECEMBER 31, 2014 ASSETS Cash and Cash Equivalents LIABILITIES Accounts Payable Agency Fund $ 71,067 $ 71,067 See accompanying notes. 20 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS INDEX NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Financial Reporting Entity B. Basis of Presentation C. Measurement Focus and Basis of Accounting D. Use of Estimates E. Assets, Liabilities, Deferred Inflows of Resources, and Equity F. Revenues, Expenditures, and Expenses G. Reclassifications NOTE 2 STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY A. Fund Accounting Requirements and Deposits and Investments Laws and Regulations B. Budgetary Information NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS A. Cash, Cash Equivalents, and Investments B. Capital Assets C. Long -Term Debt D. Interfund Transactions and Balances E. Fund Equity NOTE 4 OTHER NOTES A. Employee Defined Benefit Pension Plans — Statewide B. Employee Defined Contribution Pension Plan — Statewide C. Statewide Volunteer Firefighter Retirement Plan D. Risk Management E. Commitments F. New Accounting Standards CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the City of Scandia (the City) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. GAAP includes all relevant Governmental Accounting Standards Board (GASB) pronouncements. The City has a mayor -council form of government that is governed by an elected mayor and four -member council. The City provides the following services: sanitation, recreation, public improvements, public safety, planning and zoning, and general administrative services. LA. FINANCIAL REPORTING ENTITY The City's financial reporting entity is comprised of the primary governmental unit of the City of Scandia, Minnesota. In determining the financial reporting entity, the City complies with the provisions of GASB No. 14, The Financial Reporting Entity, and includes all component units of which the City appointed a voting majority of the units' board; the Cityis either able to impose its will on the unit or a financial benefit or burden relationship exists. Blended Component Units Blended component units are separate legal entities that meet the component unit criteria describe above and whose governing body is the same or substantially the same as the City Council or the component unit provides services entirely to the City. These component units' funds are blended into those of the City's by appropriate activity type to compose the primary government presentation. The City's blended component units consist of: Economic Development Authority — The City created an Economic Development Authority (EDA) by resolution of its City Council. The EDA is governed by a five -member board appointed by the City Council. Although it is legally separate from the City, the EDA is reported as if it were part of the primary government because its purpose is to approve the City's redevelopment plans. The EDA cannot issue bonded debt without the City's approval. Discretely Presented Component Units Discretely presented component units are separate legal entities that meet the component unit criteria described above but do not meet the criteria for blending. Currently, the City has no discretely presented component units. 1.B. BASIS OF PRESENTATION Government -wide Financial Statements The Statement of Net Position and Statement of Activities display information about the reporting government as a whole. They include all funds of the reporting entity except for fiduciary funds. The fiduciary fund is only reported in the Statement of Fiduciary Net Position at the fund financial statement level. The statements distinguish between governmental and business -type activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange revenues. Business -type activities are financed in whole or in part by fees charged to external parties for goods and services. Fund Financial Statements Fund financial statements of the reporting entity are organized into funds, each of which is considered to be separate accounting entities. Each fund is accounted for by providing a separate set of self -balancing accounts that constitute its assets, liabilities, deferred inflows, fund equity, revenues, and expenditures/expenses. Funds are organized into three major categories: governmental, proprietary, and fiduciary. An emphasis is placed on major funds within the governmental and proprietary categories. 21 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.B. BASIS OF PRESENTATION (Continued) Fund Financial Statements (Continued) A fund is considered major if it is the primary operating fund of the City or meets the following criteria: Total assets, liabilities and deferred inflows, revenues or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding total for all funds of that category or type; and Total assets, liabilities and deferred inflows, revenues or expenditures/expenses of that individual governmental or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds combined. The funds of the financial reporting entity are described below Governmental Funds General Fund The General Fund is the primary operating fund of the City and is always classified as a major fund. It is used to account for all activities except those legally or administratively required to be accounted for in other funds. Debt Service Fund The Debt Service Fund accounts for the accumulation of financial resources for the payment of interest and principal on general long-term debt of the City other than debt service payments made by enterprise funds. Ad valorem taxes are used for the payment of principal and interest on the City's judgment. Capital Projects Funds The Capital Projects Improvement Funds are used to account for financial resources to be used for the acquisition or construction of capital projects (other than funds financed by proprietary funds). Special Revenue Fund The Special Revenue Funds account for funds received by the City with a specific purpose. Proprietary Fund Enterprise Funds Enterprise Funds are used to account for business -like activities provided to the general public. These activities are financed primarily by user charges and the measurement of financial activity focuses on net income measurement similar to the private sector. Fiduciary Fund Agency Fund This fund accounts for assets held by the City as an agent for other parties. These assets cannot be used to finance the City's own operating programs. MA CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.B. BASIS OF PRESENTATION (Continued) Fund Financial Statements (Continued) Major and Nonmajor Funds The funds are further classified as major and nonmajor as follows: Fund Major: General Debt Service Fund Capital Project Fund: Equipment Replacement Fund Proprietary Funds: 201 Sewer and Uptown Sewer Nonmaj or: Special Revenue Fund Capital Project Funds Fiduciary Fund See description above. See description above. See description above. Accounts for the activities of the City for providing sewer services to the public. See description above. See description above. See description above. 1.C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements. Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. Measurement Focus On the government -wide Statement of Net Position and the Statement of Activities, both governmental and business -like activities are presented using the "economic resources" measurement focus as defined in the second bullet point below. In the fund financial statements, the "current financial resources" measurement focus or the "economic resources" measurement focus is used as appropriate: All governmental funds utilize a current financial resources measurement focus. Only current financial assets and liabilities are generally included on their balance sheets. Their operating statements present sources and uses of available spendable financial resources during a given period. These funds use fund balance as their measure of available spendable financial resources at the end of the period. The government -wide financial statements, proprietary, and fiduciary funds utilize an economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net position (or cost recovery), and financial position. All assets and liabilities (whether current or noncurrent) associated with their activities are reported. Proprietary fund equity is classified as net position. Basis of Accounting In the government -wide Statement of Net Position and Statement of Activities, both governmental and business -like activities are presented using the "accrual" basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange -like transactions are recognized when the exchange takes place. 23 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING (Continued) Basis of Accounting (Continued) In the fund financial statements, governmental funds are presented on the "modified accrual" basis of accounting. Under this modified accrual basis of accounting, revenues are recognized when "measurable and available." Measurable means knowing or being able to reasonable estimate the amount. Available means collectible within the current period or within sixty days after year end. Expenditures (including capital outlay) are recorded when the related fund liability is incurred, except for general obligation bond principal and interest which are reported when due. All proprietary and fiduciary funds utilize the accrual basis of accounting. 1.D. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. I.E. ASSETS, LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND EQUITY Cash and Cash Equivalents For purposes of the Statement of Net Position, "cash and cash equivalents" includes all demand, savings, and money market accounts for the City. For the purpose of the proprietary fund Statement of Cash Flows, "cash and cash equivalents" include all demand, savings, and money market accounts. See Note 3.A. for additional information related to Cash and Cash Equivalents. Interfund Receivables and Payables During the course of operations, transactions occur between individual funds that may result in amounts owed between funds. Those related to good and services type transactions are classified as "due to and from other funds." Short-term interfund loans are reported as "due to/from other fund." Long-term interfund loans (noncurrent portion) are reported as "advances from and to other funds." Interfund receivables and payables between funds within governmental activities are eliminated in the Statement of Net Position. See Note 3.D. for details of interfund transactions, including receivables and payables at year-end. Prepaids Prepaids represent costs paid during the current year to be recognized in future periods. Inventories Inventory is valued at the lower of average cost or market based on physical counts. Inventory in the General Fund consists of expendable supplies held for consumption and is equally offset by a nonspendable fund balance classification. The cost of inventory is recorded as an expense when purchased and adjusted at year-end. 24 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.E. ASSETS, LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND EQUITY (Continued) Receivables In the government -wide statements, receivables consist of all revenues earned at year-end and not yet received. Allowances for uncollectible accounts receivable are based upon historical trends and the periodic aging of accounts receivable and are not deemed necessary at year end. Major receivable balances for the governmental activities include charges for services, fines, fees, taxes, and special assessments. Business -type activities report utility charges as their major receivables. In the fund financial statements, material receivables in governmental funds include revenue accruals such as taxes, franchise fees, fines and charges for service since they are usually both measurable and available. Nonexchange transactions collectible but not available are deferred in the fund financial statements in accordance with modified accrual, but not deferred in the government - wide financial statements in accordance with the accrual basis. Interest and investment earnings are recorded when earned only if paid within 60 days since they would be considered both measurable and available. Proprietary fund material receivables consist of all revenues earned at year-end and not yet received. Utility accounts receivable compose the majority of proprietary fund receivables. Allowance for uncollectible accounts receivable are based upon historical trends and the periodic aging of accounts receivable. No allowances are deemed necessary at year end. Capital Assets The accounting treatment over property, plant and equipment (capital assets) depends on whether the assets are used in governmental or proprietary fund operations and whether they are reported in the government -wide or fund financial statements. Capital assets are defined by the City as assets with an initial, individual cost of more than $5,000 and must have an estimated useful life in excess of one year. The range of estimated useful lives by type of asset is as follows: Buildings and Structures 40 years Machinery and Equipment 5-25 years Vehicles 25 years Infrastructure 50 years Government -wide Statements In the government -wide financial statements, capital outlay expenditures are accounted for as capital assets. All capital assets are valued at historical cost or estimated historical cost if actual is unavailable, except for donated capital assets which are recorded at their estimated fair value at the date of donation. Depreciation of all exhaustible capital assets is recorded as an allocated expense in the Statement of Activities, with accumulated depreciation reflected in the Statement of Net Position. Depreciation is provided over the assets' estimated useful lives using the straight-line method of depreciation. Prior to January 1, 2014, the City followed a policy under which a full year of depreciation was taken on an asset in the year of its acquisition. Fund Financial Statements In the fund financial statements, capital assets used in governmental fund operations are accounted for as capital outlay expenditures of the governmental fund upon acquisition. Capital assets used in proprietary fund operations are accounted for the same as in the government -wide statements. 25 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.E. ASSETS, LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND EQUITY (Continued) Long -Term Debt The accounting treatment of long-term debt depends on whether the assets are used in governmental fund operations or proprietary fund operations and whether they are reported in the government -wide or fund financial statements. All long-term debt to be repaid from governmental and business -type resources are reported as liabilities in the government -wide statements. The long-term debt consists primarily of general obligation bonds and certificates payable. Long-term debt for governmental funds is not reported as liabilities in the fund financial statements. The debt proceeds are reported as other financing sources and payment of principal and interest are reported as expenditures. The accounting for proprietary funds is the same in the fund statements as it is in the government -wide statements. Compensated Absences It is the City's policy to permit employees to accumulate a limited amount of earned but unused leave. All leave pay is accrued when incurred in the government -wide and proprietary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as the result of an employee's resignation or retirement. In the event a liability is recorded in the governmental funds, General Fund resources would be used to liquidate the compensated absences. Deferred Inflows of Resources In addition to liabilities, the balance sheet reports a separate section for deferred inflows of resources. This element represents an acquisition of fund balance that applies to future periods and therefore will not be recognized as an inflow of resources (revenue) until that time. The City reports property taxes and special assessments as deferred inflows of resources and accordingly, these amounts are deferred and recognized as inflows of resources in the period that they become available. Because this type of unavailable revenue is only reported under a modified accrual basis of accounting, deferred inflows ofresources are only reported in the governmental funds balance sheet. Equity Classifications Government -wide Statements Equity is classified as net position and displayed in three components: Net Investment in Capital Assets — Consists of capital assets including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted — Consists of net position with constraints placed on the use either by 1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments; or 2) law through constitutional provisions or enabling legislation. Unrestricted — Remaining balance of net position that does not meet the definition of "restricted" or "net investment in capital assets." It is the City's policy to consider restricted net position to its depletion before unrestricted net position is applied. 26 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.E. ASSETS, LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND EQUITY (Continued) Equity Classifications (Continued) Fund Statements Governmental Fund Financial Statements — In the fund financial statements, governmental funds report fund balances as either nonspendable, restricted, committed, assigned, or unassigned. When the City incurs an expenditure for which it may use either restricted or unrestricted fund balances, it uses restricted fund balances first unless unrestricted fund balances will have to be returned because they were not used. When the City incurs an expenditure for purposes for which amounts in any unrestricted fund balance classification could be used, it uses fund balances in the following order: Committed, assigned, unassigned. Nonspendable — Includes amounts that cannot be spent because they are either not in spendable form, or legally or contractually required to be maintained intact. The nonspendable fund balances at December 31, 2014 consist of inventory and prepaid expenditures. Restricted — Includes the portion of fund balance which is not available for appropriation or which has been legally segregated for a specific purpose. Committed — Amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the City Council. Assigned — Amounts that are constrained by the City's intent to be used for specific purposes, but are neither restricted nor committed. Unassigned — This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the general fund. The City has formally adopted a policy under which it strives to maintain a minimum unassigned general fund balance equal to approximately 35%-50% of annual General Fund operating expenses. See Note 3.E. for additional disclosures. Proprietary Fund Financial Statements — Proprietary fund equity is classified the same as in the government -wide statements, as described on the prior page. 1.F. REVENUES, EXPENDITURES, AND EXPENSES Property Tax Under state law, municipalities are limited in their ability to levy a property tax. The City levies its property tax for the subsequent year during the month of December. The County of Washington is the collecting agency for the levy and remits the collections to the City. In the fund financial statements, property taxes are recorded as revenue in the period levied to the extent they are collected within 60 days of year-end. December 31 is the last day the City can certify a tax levy to the County Auditor for collection the following year. The County Auditor makes up the tax list for all taxable property in the City and applies the applicable tax rate to the tax capacity of individual properties to arrive at the actual tax for each property. The County Auditor also collects all special assessments, except for certain prepayments paid directly to the City. The County Auditor remits a list of taxes and special assessments to be collected on each parcel of property to the County Treasurer in January of each year. The County Treasurer collects all taxes and assessments, except as noted above. The County Treasurer mails copies of all real estate and personal property tax statements. Each year, property owners are required to pay one half of their real estate taxes by May 15 and the balance by October 15. Penalties and interest are assessed to property owners who do not pay their property taxes and special assessments by the due dates. 27 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) I.F. REVENUES, EXPENDITURES, AND EXPENSES (Continued) Property Tax (Continued) Delinquent taxes receivable include the past six years' uncollected taxes. Delinquent taxes have been offset by deferred inflows of resources for taxes not received within 60 days after year end in the fund financial statements. Operating Revenues and Expenses Operating revenues and expenses for proprietary funds are those that result from providing services and producing and delivering goods and/or services. It also includes all revenue and expenses not related to capital and noncapital financing or investing activities. Expenditures/Expenses In the government -wide financial statements, expenses are classified by function for both governmental and business -type activities. In the fund financial statements, expenditures are classified as follows: Governmental Funds — By Character Current (further classified by Function) Debt Service Capital Outlay Proprietary Fund — By Operating and Nonoperating In the fund financial statements, governmental funds report expenditures of financial resources. Proprietary funds report expenses relating to use of economic resources. Interfund Transfers Permanent reallocations of resources between funds of the reporting entity are classified as interfund transfers. For the purpose of the Statement of Activities, all interfund transfers between individual governmental funds, as well as all interfund transfers between individual proprietary funds, have been eliminated. See additional information at Note 3.D. 1.G. RECLASSIFICATIONS Certain amounts from 2013 have been reclassified to conform to the 2014 presentation in the Management's Discussion and Analysis section. NOTE 2 STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY 2.A. FUND ACCOUNTING REQUIREMENTS AND DEPOSITS AND INVESTMENTS LAWS AND REGULATIONS By its nature as a local government unit, the City is subject to various federal, state, and local laws and contractual regulations. The City complies with all state and local laws and regulations requiring the use of separate funds. In accordance with state law, all uninsured deposits of municipal funds in financial institutions must be secured with acceptable collateral valued at the lower of market or par. Minnesota Statutes require that all deposits with financial institutions be collateralized in an amount equal to 110% of deposits in excess of FDIC or FSLIC insurance (100% if collateral pledged is irrevocable standard letters of credit issued by the Federal Home Loan Bank). The City complies with such laws. 28 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 2 STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY (Continued) 2.B. BUDGETARY INFORMATION Annual budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America. All annual appropriations lapse at fiscal year-end. The City does not use encumbrance accounting. NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS The following notes present detail information to support the amounts reported in the basic financial statements for its various assets, liabilities, deferred inflows, equity, revenues, and expenditures/expenses. 3.A. CASH, CASH EQUIVALENTS, AND INVESTMENTS Deposits In accordance with applicable Minnesota Statutes, the City maintains deposits at depository banks authorized by the City Council. Minnesota Statutes require that all City deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110 percent of the deposits not covered by insurance or bonds (100% if collateral pledged is irrevocable standard letters of credit issued by the Federal Home Loan Bank). Authorized collateral in lieu of a corporate surety bond includes: United States government Treasury bills, Treasury notes, Treasury bonds; Issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity; A general obligation of a state or local government, with taxing powers, rated "A" or better; A revenue obligation of a state or local government, with taxing powers, rated "AA" or better; Unrated general obligation securities of a local government, with taxing powers, pledged as collateral against funds deposited by that same local government entity; Irrevocable standby letter of credit issued by a Federal Home Loan Bank accompanied by written evidence that the Federal Home Loan Bank's public debt is rated "AA" or better by Moody's or Standard and Poor's; or Time deposits insured by any federal agency. Minnesota Statutes require that all collateral shall be placed in safekeeping in a restricted account at a Federal Reserve Bank, or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral. At December 31, 2014, the City's deposits were not exposed to custodial credit risk. The City's deposits were sufficiently covered by federal depository insurance or by collateral held by the government's agent in the government's name. 29 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.A. CASH, CASH EQUIVALENTS, AND INVESTMENTS (Continued) Investments The City may also invest idle funds as authorized by Minnesota Statutes as follows: direct obligations guaranteed by the United States or its agencies; shares of investment companies registered under the Federal Investment Company Act of 1940 that received the highest credit rating, are rated in one of the two highest rating categories by a statistical rating agency, and all of the investments have a final maturity of 13 months or less; general obligations rated "A" or better; revenue obligations rated "AA" or better; general obligations of the Minnesota Housing Finance Agency rated "A" or better; bankers' acceptances of United States banks eligible for purchase by the Federal Reserve System; commercial paper issued by United States corporations or their Canadian subsidiaries, rated of the highest quality category by at least two nationally recognized rating agencies, and maturing in 270 days or less; Guaranteed Investment Contracts guaranteed by a United States commercial bank, domestic branch of a foreign bank, or a United States insurance company, and with a credit quality in one of the top two highest categories; repurchase or reverse purchase agreements and securities lending agreements with financial institutions qualified as a "depository" by the government entity, with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000, a primary reporting dealer in U.S. government securities to the Federal Reserve Bank ofNew York, or certain Minnesota securities broker-dealers. The City does not have any investment policies that would further limit investment choices. At December 31, 2014, the City does not hold any investments. 30 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.B. CAPITAL ASSETS Capital asset activity for the year ended December 31, 2014 is as follows: Balance at Balance at 01/01/14 Additions Disposals Transfers 12/31/14 Governmental Activities: Capital Assets not Being Depreciated Land $ 487,735 $ - $ - $ - $ 487,735 Construction In Progress 25,761 13,700 - (39,461) - Total Capital Assets not Being Depreciated 513,496 13,700 - (39,461) 487,735 Capital Assets Being Depreciated Buildings 2,232,670 - - 39,461 2,272,131 Equipment 653,256 202,163 - - 855,419 Vehicles 1,306,557 - (66,744) - 1,239,813 Infrastructure 9,273,769 10,150 - - 9,283,919 Other Improvements 162,647 - - - 162,647 Total Capital Assets Being Depreciated 13,628,899 212,313 (66,744) 39,461 13,813,929 Less: Accumulated Depreciation Buildings (809,106) (48,656) - - (857,762) Equipment (339,115) (53,844) - - (392,959) Vehicles (583,507) (55,249) 66,744 - (572,012) Infrastructure (3,177,984) (236,211) - - (3,414,195) Other Improvements (88,801) (5,529) - - (94,330) Total Accumulated Depreciation (4,998,513) (399,489) 66,744 - (5,331,258) Total Capital Assets Being Depreciated, Net 8,630,386 (187,176) - 39,461 8,482,671 Capital Assets, Net $ 9,143,882 $ (173,476) $ - $ - $ 8,970,406 31 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.B. CAPITAL ASSETS (Continued) Business -Type Activities: Capital Assets Being Depreciated Sewer Plant Equipment Uptown Sewer Total Capital Assets Being Depreciated Less: Accumulated Depreciation 201 Sewer Plant Equipment Uptown Sewer Total Accumulated Depreciation Total Capital Assets Being Depreciated, Net Business -Type Activites Balance at Balance at 01/01/14 Additions Disposals 12/31/14 $ 1,500,000 $ - $ - $ 1,500,000 - 21,275 - 21,275 243,827 - - 243,827 1,743,827 21,275 - 1,765,102 (720,000) (30,000) - (750,000) - (236) - (236) (38,814) (4,876) - (43,690) (758,814) (35,112) - (793,926) 985,013 (13,837) - 971,176 $ 985,013 $ (13,837) $ - $ 971,176 Depreciation is charged to governmental activities as follows: General Government $ 14,816 Public Safety 50,029 Public Works 325,268 Parks and Recreation 9,376 Total Depreciation Expense $ 399,489 3.C. LONG-TERM DEBT The reporting the City's long-term debt is segregated between the amounts to be repaid from governmental activities and amounts to be repaid from business -type activities (none). All bonds and certificates set forth below are direct obligations of the City and pledge the full faith and credit of the City. 32 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.C. LONG-TERM DEBT (Continued) As of December 31, 2014, the long-term debt of the financial reporting entity consists of the following: Governmental Activities Issue n.,.o 2007 Improvement Bonds 5/07 2010 Equipment Certificate 7/10 2011 Equipment Certificate 7/11 2013 Equipment Certificate 7/13 Changes in Long -Term Debt General Obligation Debt Balance Annual Interest Maturity Payment Rate(s) Date $125000-250,000 3.65-4.10% 12/17 $40,000 2.20-3.55% 2/16 $30,000 2.75-3.95% 12/16 $50,000 - 65,000 1.00-2.50% 7/23 Total Governmental Activities Bonds Payable Bonds Due Within One Year $ 1,325,000 Bonds Due After One Year Original Remaining Amount Amount The following is a summary of changes in long-term debt for the year ended December 31, 2014: 1,430,000 $ 375,000 200,000 80,000 150,000 60,000 570,000 515,000 1,030,000 250,000 $ 780,000 Amounts Due Interest expense totals $44,766 in the Statement of Activities (included in Debt Service line). Interest expense totals $40,118 for the Statement of Revenues, Expenditures and Changes in Fund Balances — Governmental Funds (included in the line Interest and Other Charges). 33 Balance Balance Within Type of Debt 1/1/14 Additions Deductions 12/31/14 One Year Governmental Activities: General Obligation Notes $ 1,325,000 $ - $ (295,000) $ 1,030,000 $ 250,000 Compensated Absences 23,977 24,231 (18,821) 29,387 29,387 Total Long -Term Debt $ 1,348,977 $ 24,231 $ (313,821) $ 1,059,387 $ 279,387 Interest expense totals $44,766 in the Statement of Activities (included in Debt Service line). Interest expense totals $40,118 for the Statement of Revenues, Expenditures and Changes in Fund Balances — Governmental Funds (included in the line Interest and Other Charges). 33 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.C. LONG-TERM DEBT (Continued) Annual Debt Service Requirements At December 31, 2014, the estimated annual debt service requirements to maturity, including principal and interest, are as follows for the City's governmental activities: Years Ending Governmental Activities December 31, Principal Interest Total 2015 $ 250,000 $ 30,598 $ 280,598 2016 250,000 22,471 272,471 2017 180,000 14,688 194,688 2018 55,000 8,573 63,573 2019 55,000 7,418 62,418 Thereafter 240,000 14,280 254,280 Totals $ 1,030,000 $ 98,028 $ 1,128,028 Governmental activity debt is typically funded through the Debt Service Fund. 3.D. INTERFUND TRANSACTIONS AND BALANCES Operating transfers consist of the following for the year ended December 31, 2014: Transfers In Major Funds Non -major Funds Transfers Equipment Other Major Funds Out Replacement Governmental Total General $ 300,000 $ 100,000 $ 200,000 $ 300,000 Transfers are used to (a) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget require to expend them and to (b) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. The interfund balances are as follows: Long -Term Advances Due To Fund Due From Fund Capital Improvement Uptown Sewer Amount Reason $ 34,308 Sewer improvements Short -Term Balances Due To Fund Due From Fund General Fund Uptown Sewer 2,300 Eliminate negative cash Total Interfund Balances $ 36,608 The Uptown Sewer Fund monies owed to the General Fund and Capital Improvement Fund will be repaid as future sewer charges are collected and the cash flows become available. 34 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 3 DETAIL NOTES ON TRANSACTION CLASSES/ACCOUNTS (Continued) 3.E. FUND EQUITY At December 31, 2014, governmental fund equity consists of the following: General Fund Nonspendable - Prepaids and Inventory $ 9,285 Restricted for Road Maintenance Committed for Capital Improvements 124,673 Restricted for Erickson Ballfield 128,137 10,625 Unassigned Assigned for Local Road Improvements 1,571,307 Total General Fund Balance $ 1,715,890 Debt Service Fund Restricted for Debt Service $ 350,769 Equipment Replacement Fund Restricted for Equipment Replacement 9,453 Assigned for Equipment Replacement 441,570 Total Equipment Replacement Fund Balance $ 451,023 Other Governmental Funds Nonspendable - Advance to Other Fund $ 34,308 Committed for Economic Development 760 Committed for Capital Improvements 301,157 Committed for Local Road Improvements 128,137 Assigned for Park Capital Improvements 1,067 Assigned for Local Road Improvements 200,000 Total Other Governmental Funds Balance $ 665,429 NOTE 4 OTHER NOTES 4.A. EMPLOYEE DEFINED BENEFIT PENSION PLANS - STATEWIDE Plan Description All full-time and certain part-time employees of the City of Scandia are covered by defined benefit plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA administers the General Employees Retirement Fund (GERF), which is a cost-sharing, multiple -employer retirement plan. This plan is established and administered in accordance with Minnesota Statutes, Chapters 353 and 356. GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new members must participate in the Coordinated Plan. PERA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by State Statute, and vest after five years of credited service. The defined retirement benefits are based on a member's highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. 35 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 4 OTHER NOTES (Continued) 4.A. EMPLOYEE DEFINED BENEFIT PENSION PLANS - STATEWIDE (Continued) Plan Description (Continued) Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher of a step -rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2 percent of average salary for each of the first 10 years of service and 2.7 percent for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2 percent of average salary for each of the first 10 years and 1.7 percent for each remaining year. Under Method 2, the annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each year of service. For all GERF members hired prior to July 1, 1989 whose annuity is calculated using Method 1, a full annuity is available when age plus years of service equal 90. Normal retirement age is 65 for Basic and Coordinated members hired prior to July 1, 1989. Normal retirement age is the age for unreduced Social Security benefits capped at 66 for Coordinated members hired on or after July 1, 1989. A reduced retirement annuity is also available to eligible members seeking early retirement. There are different types of annuities available to members upon retirement. A single -life annuity is a lifetime annuity that ceases upon the death of the retiree -no survivor annuity is payable. There are also various types of joint and survivor annuity options available which will be payable over joint lives. Members may also leave their contributions in the fund upon termination of public service in order to qualify for a deferred annuity at retirement age. Refunds of contributions are available at any time to members who leave public service, but before retirement benefits begin. The benefit provisions stated in the previous paragraphs of this section are current provisions and apply to active plan participants. PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF. That report may be obtained on the Internet at www.mnpera.org, by writing to PERA at 60 Empire Drive #200, St. Paul, Minnesota, 55103-2088 or by calling (651) 296-7460 or 1-800-652-9026. Funding Policy Minnesota Statutes Chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the state legislature. The City makes annual contributions to the pension plans equal to the amount required by state statutes. GERF Basic Plan members and Coordinated Plan members were required to contribute 9.1% and 6.25%, respectively, of their annual covered salary in 2014. In 2014, the City was required to contribute the following percentages of annual covered payroll: 11.78% for Basic Plan GERF members and 7.25% for Coordinated Plan GERF members. The City's contributions to the General Employees Retirement Fund for the years ending December 31, 2014, 2013, and 2012 total $24,373, $21,074, and $20,284, respectively. The City's contributions are equal to the contractually required contributions for each year as set by State Statute. Contribution rates will increase on January 1, 2015 in the Coordinated Plan (6.5% for members and 7.5% for employers). 4.B. EMPLOYEE DEFINED CONTRIBUTION PENSION PLAN - STATEWIDE The council members of the City of Scandia are covered by the Public Employees Defined Contribution Plan (PEDCP), a multiple - employer deferred compensation plan administered by the Public Employees Retirement Association of Minnesota (PERA). The PEDCP is a tax qualified plan under Section 401(a) of the Internal Revenue Code and all contributions by or on behalf of employees are tax deferred until time of withdrawal. 36 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 4 OTHER NOTES (Continued) 4.B. EMPLOYEE DEFINED CONTRIBUTION PENSION PLAN - STATEWIDE (Continued) Plan benefits depend solely on amounts contributed to the plan plus investment earnings, less administrative expenses. Minnesota Statutes, Chapter 353D.03, specifies plan provisions, including the employee and employer contribution rates for those qualified personnel who elect to participate. An eligible elected official who decides to participate contributes 5 percent of salary which is matched by the elected official's employer. Employer and employee contributions are combined and used to purchase shares in one or more of the seven accounts of the Minnesota Supplemental Investment Fund. For administering the plan, PERA receives 2 percent of employer contributions and twenty-five hundredths of one percent of the assets in each member's account annually. Total contributions made by the City during fiscal year 2014 amount to $824. 4.C. STATEWIDE VOLUNTEER FIREFIGHTER RETIREMENT PLAN Plan Description Beginning January 1, 2011, the City joined the Voluntary Statewide Volunteer Firefighter Retirement Plan (the Plan) administered by the Public Employees Retirement Association (PERA). The plan is an agent lump -sum defined benefit plan. Plan assets are managed by the Minnesota State Board of Investment. The Plan is voluntary and open to fire departments as a replacement of their existing volunteer firefighter retirement plan. It is also open to municipalities currently without a volunteer firefighter retirement plan. The Plan is codified as Minnesota Statutes Chapter 353G. The lump sum benefits payable from the Plan are funded by existing fire state aid allocated to a municipality, additional municipal contributions, as applicable, and earnings on the investment of these funds. Each participating entity will have a separate Entity Account in which the assets necessary to fund the benefits will be maintained. PERA performs annual calculations for each Entity Account to assess the level of funding needed to maintain assets sufficient to pay the benefits being earned by the participating entity's volunteer firefighters. The calculations will resemble the procedure already defined in law for use by all existing volunteer fire relief associations. Required contributions for the coming year will be based on service credit data provided to PERA in March of each year by each participating entity's fire chief. The City is able to voluntarily contribute above and beyond the required contribution amount. Retirement Benefits The Plan provides for the payment of lump sum retirement benefits that are based on a specific dollar value paid for each year of credited service accumulated by a volunteer firefighter who terminates service and meets the minimum requirements for receipt of the benefits. The dollar value payable per year of service is determined by the sponsoring municipality or entity at the time an election to participate in the Plan is made, selected from 20 possible benefit levels. An entity may elect to increase the benefit level after joining the Plan. The benefit level approved by the City is $2,500 per year of service. To be eligible for a benefit, a firefighter must: Be at least 50 years old; Be vested, which means having acquired a minimum of 5 years of "good-time" service credit in the Plan; and Have severed his or her employment relationship with the fire department for a minimum of 30 days. 37 CITY OF SCANDIA, MINNESOTA NOTES TO THE BASIC FINANCIAL STATEMENTS DECEMBER 31, 2014 NOTE 4 OTHER NOTES (Continued) 4.C. STATEWIDE VOLUNTEER FIREFIGHTER RETIREMENT PLAN (Continued) Retirement Benefits (Continued) A full retirement benefit is payable to a firefighter with 20 years of service. Firefighters retiring with fewer than 20 but at least 5 years of service are eligible for a percentage of a full benefit. Former members of the fire department who were vested at the time they left the department are also entitled to benefits when they attain age 50. Total employer contributions made during fiscal year 2014 are as follows: City Contributions $ 18,259 State Aid 24,368 Total Contributions $ 42,627 4.D. RISK MANAGEMENT The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. To manage these risks, the City purchases commercial insurance. The City retains risk for the deductible portions of the insurance. The amounts of these deductibles are considered immaterial to the financial statements. There were no significant reductions in insurance from the previous year settlements in excess of insurance for any of the past two years. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities, if any, include an amount for claims that have been incurred but not reported. The City's management is not aware of any incurred but no reported claims. 4.E. COMMITMENTS Law Enforcement Services The City receives law enforcement services under an agreement with Washington County. Such agreement automatically renews on an annual basis and calls for the City to compensate the County based on the actual costs incurred while providing services under the agreement. Based on the 2015 contract budget, expenditures anticipated under this agreement for 2015 are estimated at $110,795. 201 Sewer System Upgrades During 2014, the City accepted a proposal for upgrades to the 201 Sewer System in the amount of $94,918. Such project is expected to be completed in 2015. 4.F. NEW ACCOUNTING STANDARDS Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date will be implemented in the next fiscal year. The effect of the implementation will reflect the City's share of the Public Employees Retirement Association and Fire Relief Association net pension liability on the Statement of Net Position. The effect on net position will likely be significant. 38 REQUIRED SUPPLEMENTARY INFORMATION Required supplementary information includes financial information and disclosures that are required by the GASB but are not considered a part of the basic financial statements. Such information includes: Budgetary Comparison Schedule -General Fund CITY OF SCANDIA, MINNESOTA BUDGETARY COMPARISON SCHEDULE -GENERAL FUND FOR THE YEAR ENDED DECEMBER 31, 2014 RESOURCES (INFLOWS): Taxes Licenses, Permits, & Fees Intergovernmental Charges for Services Fines Investment Income Miscellaneous AMOUNTS AVAILABLE CHARGES TO APPROPRIATIONS (OUTFLOWS): General Government: Mayor and Council Planning and Buildings Elections General Government Public Safety: Police Fire Public Works Parks and Recreation Capital Outlay Transfers Out TOTAL CHARGES BUDGETARY CHANGE IN FUND BALANCE Budget Actual Variance with Amounts- Amounts Final Budget Original and Budgetary Over Final Basis (Under) $ 1,642,266 $ 1,650,184 $ 7,918 53,795 83,659 29,864 34,583 43,926 9,343 169,244 227,736 58,492 16,000 13,468 (2,532) 7,100 4,947 (2,153) 16,010 46,277 30,267 1,938,998 2,070,197 131,199 18,839 18,406 (433) 166,200 66,885 (99,315) 6,110 5,827 (283) 342,043 320,497 (21,546) 122,068 121,113 (955) 263,466 215,200 (48,266) 819,035 798,551 (20,484) 95,738 102,243 6,505 5,500 - (5,500) 300,000 300,000 - 2,138,999 1,948,722 (190,277) $ (200,001) $ 121,475 $ 321,476 39 OTHER SUPPLEMENTARY INFORMATION Other supplementary information includes financial statements and schedules not required by GASB, nor a part of the basic financial statements, but are presented for purposes of additional analysis. Such statements and schedules include: Combining Statements — Nonmajor Governmental Funds Combining Schedules — Nonmajor Debt Service Fund ASSETS Cash and Cash Equivalents Advance to Other Fund TOTAL ASSETS FUND BALANCES Nonspendable Committed Assigned TOTAL FUND BALANCES CITY OF SCANDIA, MINNESOTA COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS DECEMBER 31, 2014 Economic Development Authority Fund Capital Improvement Fund 760 $ 301,157 $ 34,308 Park Capital Improvement Fund 1,067 $ Local Road Improvement Fund Total Nonmaj or Governmental Funds 328,137 $ 631,121 - 34,308 $ 760 $ 335,465 $ 1,067 $ 328,137 $ 665,429 760 34,308 $ - $ - $ 34,308 301,157 - 128,137 430,054 - 1,067 200,000 201,067 $ 760 $ 335,465 $ 1,067 $ 328,137 $ 665,429 40 CITY OF SCANDIA, MINNESOTA COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED DECEMBER 31, 2014 REVENUES Taxes Charges for Services Investment Income TOTAL REVENUES EXPENDITURES Current: Public Works Economic Development Capital Outlay TOTAL EXPENDITURES EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES OTHER FINANCING SOURCES Operating Transfers In NET CHANGE IN FUND BALANCES FUND BALANCES - BEGINNING FUND BALANCES - ENDING Economic Park Local Total Development Capital Capital Road Nonmajor Authority Improvement Improvement Improvement Governmental Fund Fund Fund Fund Funds $ 1,000 $ 94,400 $ - $ 127,704 $ 223,104 - - 3,000 - 3,000 - 699 12 433 1,144 1,000 95,099 3,012 128,137 227,248 - 1,129 - - 1,129 240 - - - 240 - 26,036 9,929 - 35,965 240 27,165 9,929 - 37,334 760 67,934 (6,917) 128,137 189,914 - - - 200,000 200,000 760 67,934 (6,917) 328,137 389,914 - 267,531 7,984 - 275,515 $ 760 $ 335,465 $ 1,067 $ 328,137 $ 665,429 41 ASSETS Cash and Cash Equivalents Property Taxes Receivable Assessments Receivable TOTAL ASSETS LIABILITIES Accounts Payable DEFERRED INFLOWS OF RESOURCES Unavailable Revenue: Special Assessments FUND BALANCE Restricted TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND FUND BALANCES CITY OF SCANDIA, MINNESOTA SUPPLEMENTAL COMBINING BALANCE SHEET DEBT SERVICE FUND DECEMBER 31, 2014 2007 2010 2011 2013 Total Improvement 2000 Equipment Equipment Equipment Debt Bond Fire Hall Bond Certificates Certificates Certificates Service $ 287,053 $ 3 93,423 $ 380,479 $ $ 50,930 $ 5,099 $ 8,119 $ 351,201 - - - 3 - - - 93,423 $ 50,930 $ 5,099 $ 8,119 $ 444,627 - $ - $ - $ 435 $ 435 93,423 - - - - 93,423 287,056 - 50,930 5,099 7,684 350,769 $ 380,479 $ - $ 50,930 $ 5,099 $ 8,119 $ 444,627 42 CITY OF SCANDIA, MINNESOTA SUPPLEMENTAL COMBINING SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE DEBT SERVICE FUND FOR THE YEAR ENDED DECEMBER 31, 2014 REVENUES Taxes Special Assessments Investment Income TOTAL REVENUES EXPENDITURES Debt Service: Principal Interest and Other Charges TOTAL EXPENDITURES EXCESS OF REVENUES OVER EXPENDITURES OTHER FINANCING SOURCES (USES) Operating Transfers In Operating Transfers Out TOTAL OTHER FINANCING SOURCES (USES) NET CHANGE IN FUND BALANCE FUND BALANCE - BEGINNING FUND BALANCE - ENDING 2007 40,000 2010 2011 2013 Total Improvement 2000 Equipment Equipment Equipment Debt Bond Fire Hall Bond Certificates Certificates Certificates Service $ 134,609 $ 42,852 $ 45,297 $ 34,965 $ 69,783 $ 327,506 21,240 - - - - 21,240 698 49 129 14 - 890 156,547 42,901 45,426 34,979 69,783 349,636 130,000 40,000 40,000 30,000 55,000 295,000 20,388 2,135 3,330 3,300 12,390 41,543 150,388 42,135 43,330 33,300 67,390 336,543 6,159 766 2,096 1,679 2,393 13,093 19,321 - - - - 19,321 - (19,321) - - - (19,321) 19,321 (19,321) - - - - 25,480 (18,555) 2,096 1,679 2,393 13,093 261,576 18,555 48,834 3,420 5,291 337,676 $ 287,056 $ - $ 50,930 $ 5,099 $ 7,684 $ 350,769 43 OTHER REPORTS SCHLENNER WENNELt&Q0. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS CONSULTANTS 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 March 24, 2015 Honorable Mayor and City Council City of Scandia Scandia, 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 ofthe 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 Scandia (the City) as of and for the year ended December 31, 2014, and the related notes to the financial statements, which collectively comprise the City of Scandia's basic financial statements, and have issued our report thereon dated March 24, 2015. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City of Scandia'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 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 following deficiencies described in the accompanying Schedule ofFindings and Responses to be material weaknesses: 2013-1 and 2013-3. 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 following deficiency described in the accompanying Schedule of Findings and Responses to be a significant deficiency: 2013-2. An Independently Owned Member, McGladrey Alliance St. Cloud Little Falls Albany Maple Lake Monticello 630 Roosevelt Rd. Ste. 201 109 E. Broadway 115 6th St. 220 Hwy. 55 North, Ste. 4 114 W. 3rd St. P.O. Box 1496 P.O. Box 365 P.O. Box 268 P.O. Box 385 P.O. Box 755 St. Cloud, MN 56302 Little Falls, MN 56345 Albany, MN 56307 Maple Lake, MN 55358 Monticello, MN 55362 320.251.0286 320.632.6311 320.845.2940 320.963.5414 763.295.5070 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's Response to Findings The City of Scandia's response to the findings identified in our audit is described in the accompanying Schedule of Findings and Responses. The City's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 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 results 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. SCHLENNER WENNER & CO. St. Cloud, Minnesota 45 CITY OF SCANDIA, MINNESOTA SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2014 Finding 2013-1 Limited Segregation of Duties Condition: The City has limited segregation of accounting duties. Criteria: The basic premise of proper segregation of duties is that no one employee should have access to both physical assets and the related accounting records or to all phases of the transaction. Cause: There are a limited number of employees. Effect.• The City's lack of adequate segregation of accounting duties could adversely affect the City's ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. Recommendation: Although the number of employees may not be large enough to eliminate this deficiency, we recommend that the City evaluate current procedures and segregate where possible and implement compensating controls. Management's Response: Management agrees with our recommendation. Finding 2013-2 Financial Statement Preparation Condition: Schlenner Wenner & Co. drafted the audited financial statements and related footnote disclosures for the City. These financial statements, including disclosures, were reviewed by management and management has taken responsibility for them. Criteria: Internal controls over financial reporting should be in place to provide for the preparation of financial statements on an annual basis. Cause: We believe management would require additional training in order to prepare the financial statements and year-end adjustments internally. Effect: The outsourcing of these services is not unusual in entities of the size of the City of Scandia and is the result of management's cost benefit decision to rely on our expertise rather than incurring this internal resource cost. However, errors can occur in the financial statements that may not be detected by management. Recommendation: While the City may not have adequate controls in place to eliminate this finding, the City should adopt a formal written internal control policy to document its annual review of the financial statements and year-end adjustments. Management's Response: Management agrees with our recommendation. 46 CITY OF SCANDIA, MINNESOTA SCHEDULE OF FINDINGS AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2014 Finding 2013-3 Material Audit Adjustments Condition: Audit adjustments were required to correct material misstatements identified in the trial balance presented for the audit. Criteria: The City is required to report accurate financial information. Cause: The City has not established controls to ensure all accounts are adjusted to their proper year-end balances in accordance with accounting principles generally accepted in the United States of America. Effect.• The misstatements in the trial balance presented for the audit resulted in the need to record audit adjustments to achieve fair financial statement presentation under accounting principles generally accepted in the United States of America. Recommendation: We recommend management perform a thorough review of the trial balance prior to the audit and ensure all accounts have been properly adjusted at year-end. Management's Response: Management agrees with our recommendation. 47 SCHLENNER WENNELR&CO. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS CONSULTANTS INDEPENDENT AUDITORS' REPORT ON MINNESOTA LEGAL COMPLIANCE March 24, 2015 Honorable Mayor and City Council City of Scandia Scandia, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Scandia, Minnesota (the City) as of and for the year ended December 31, 2014, and the related notes to the financial statements, and have issued our report thereon dated March 24, 2015. The Minnesota Legal Compliance Audit Guide for Political Subdivisions, promulgated by the State Auditor pursuant to Minnesota Statute Section 6.65, contains 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, except that we did not test for compliance with the provisions for tax increment financing as the City does not have any tax increment districts. 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 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. This report is intended for the information and use of the City Council and management of the City of Scandia and the State Auditor and is not intended to be and should not be used by anyone other than these specified parties. SCHLENNER WENNER & CO. St. Cloud, Minnesota An Independently Owned Member, McGladrey Alliance St. Cloud Little Falls Albany Maple Lake Monticello 630 Roosevelt Rd. Ste. 201 109 E. Broadway 115 6th St. 220 Hwy. 55 North, Ste. 4 114 W. 3rd St. P.O. Box 1496 P.O. Box 365 P.O. Box 268 P.O. Box 385 P.O. Box 755 St. Cloud, MN 56302 Little Falls, MN 56345 Albany, MN 56307 Maple Lake, MN 55358 Monticello, MN 55362 320.251.0286 320.632.6311 320.845.2940 320.963.5414 763.295.5070