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TOWN OF SPRING LAKESCOTT COUNTY, MINNESOTA

SCHEDULE OF FINDINGS AND RECOMMENDATIONSFOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

I. COMPLIANCE

Issuance of General Obligation Improvement Bonds

The Town issued $129,000 of General Obligation Improvement Bonds, Series1995A, to finance Town road improvements. The bonds are dated November 1,1995. According to documentation provided by the Town, the bonds wereissued in accordance with the legal requirements of Minn. Stat. chs. 429and 475. Minn. Stat. § 475.58, subd. 1, exempted the issuance from theapproval of the electors because the bonds represented an obligation for animprovement for which special assessments are to be assessed and collected todefray the cost of the project (not less than 20 percent of the cost of theimprovements). The Town used the services of its legal counsel and a publicfinance advisor. An informational meeting on the paving projects was held onJuly 13, 1995, and a public hearing on proposed assessments was held onSeptember 14, 1995. On October 12, 1995, the Town Board approvedResolutions 95.5 and 95.6. Resolution 95.5 was the order for the streetimprovements and Resolution 95.6 adopted the assessment roll for the 1995street improvement projects.

Minn. Stat. § 475.57 requires that the proceedings for issuing bonds shall beinitiated by a resolution of the governing body stating the amount proposed to beborrowed and the purpose for which the debt is to be incurred. The Town'srecords did not contain copies of Town Board Resolutions 95.5 and 95.6.

We recommend that, in the future, the Town's officers maintain copies of allnecessary documentation in their official records to provide proof that the Townis in compliance with all legal provisions related to public indebtedness and itsissuance.

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Missing Minutes of Annual Town Meeting and Supporting Documentation for Disbursements

The minutes of the March 12, 1996, annual Town meeting indicated that theMarch and August 1995 annual Town meeting minutes were read and that theminutes of the annual Town meeting were published in the legal newspaper. TheTown’s officers, however, were unable to produce minutes of the proceedingsof the March 1995 annual Town meeting when we requested them for thepurposes of this audit. When and how the minutes were lost is unknown.

The Town's officers also could not provide adequate supporting documentation(such as bills or invoices) for numerous disbursements made by the Town duringthe period we audited. For the years ended December 31, 1995 and 1996, thisamounted to 81.44 and 10.60 percent, respectively, of the Town's moniesdisbursed during those periods. For April 1996 alone, with only one exception,no disbursements made during that month could be supported by either a claimform or any other supporting documentation from the records produced by theTown. This absence of supporting documentation results in a qualification of theauditor's opinion on the financial statements due to a limitation in the scope ofour audit. In instances where no supporting documentation was provided to us,we compared canceled order-checks to the listing of disbursements by monthmaintained by the Town Treasurer and then used the listings to classify thedisbursements for the Town's financial statements.

All disbursements should be supported by a claim form with original bills orinvoices attached to the claim. This enables the Town Board to more easilydetermine that the claim is valid and that it is reasonable and necessary. Withoutsupporting documentation, there is no assurance that the claim is a valid claimagainst the Town. Current Town officers do not know what happened to theclaims or their supporting documentation, or whether they ever existed.

Minn. Stat. § 367.01 requires that immediately after qualifying for office, newtown officers shall “demand from the officer’s predecessor or other person havingcontrol or possession of them, all books, records, and other property belongingto the office,” and the person having possession of them “shall, upon demand,deliver them to the officer.” Furthermore, according to Minn. Stat. § 367.11, itshall be the duty of the Town Clerk to “keep in the clerk’s office a true record ofall of its proceedings,” and, unless otherwise provided by law, to have “custodyof the records, books, and papers of the town and file and safely keep all papersrequired by law to be filed in the clerk’s office. . . .” These requirements areconsistent with those of Minn. Stat. § 15.17 which provides that Minnesotagovernmental units and their public officers “shall make and preserve all recordsnecessary to a full and accurate knowledge of their official activities.” This duty

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not only prohibits destruction, but requires the Town and its chief administrativeofficer to take necessary steps to keep public records from deteriorating. Thisstatute also requires that all records be delivered to the legal custodian'ssuccessor upon expiration of the term of office of appointment. Finally, Minn.Stat. § 138.225 prohibits the unauthorized disposal of government records.

We recommend that Town officers take immediate precautions to safeguard allTown books, records, papers, and property. In the future, there should be a planto address the orderly transfer of these items from predecessor to successoroffice holders. We also recommend the Town officers again attempt to locate theminutes of the March 1995 annual Town meeting. The Town Board shouldconsider adopting the General Records Retention Schedule for Townships, issuedby the Minnesota Department of Administration. Town officers, including theTown Clerk and the Town Treasurer, should not dispose of any records until sucha schedule is adopted.

Questionable Disbursements

During our audit, we noted instances where the expenditure of public funds bythe Town Board failed to meet the public purpose doctrine. In the State ofMinnesota, public funds may be expended if “the purpose is a public one forwhich tax money may be used, and there is authority to make the expenditure,and the use is genuine. . . .” Tousley v. Leach, 180 Minn. 293, 296, 230 N.W.788, 789 (1930). Minnesota courts generally construe “public purpose” to mean“such an activity as will serve as a benefit to the community as a body andwhich, at the same time, is directly related to the functions of government.”Visina v. Freeman, 252 Minn. 177, 184, 89 N.W. 2d 635, 643 (Minn. 1958).The public purpose requirement applies to all funds expended by a public entity,not just to revenues derived from taxation (Op. Atty. Gen. 107a-3, January 22,1980).

During 1995, the Town Board authorized and approved payments for a sympathyarrangement (a plant) and funeral flowers. The cost of these two purchases was$69.26. The Minnesota Attorney General has held that there is no public purposein giving gifts to employees or third parties (Op. Atty. Gen. 107a-3, January 22,1980; Op. Atty. Gen. July 10, 1946; Op. Atty. Gen. 59a-22, December 4, 1934;Op. Atty. Gen. 442a-17, January 17, 1938; see McQuillan on MunicipalCorporations § 39.19).

We recommend that the Town Board follow state law and not expend publicfunds unless there is a public purpose.

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Obtaining Broker Certification Form

After 1996, the Town Treasurer purchased $100,000 of shares of Prime RateIncome Trust, a closed-end business trust managed by Van Kampen AmericanCapital. The trust invests primarily in collateralized loans to corporations. Theloans in the trust's portfolio typically mature within three to seven years. Wenoted this trust requests that funds be invested with it for five or more years.Early withdrawal charges imposed range from three percent for withdrawals madein the first year to one percent for withdrawals made in the fifth year.

Permissible investments for towns and other government entities, as defined inMinn. Stat. § 118A.01, are listed in Minn. Stat. §§ 118A.04 and 118A.05. TheTown's investment in a closed-end business trust which invests primarily incollateralized loans to corporations, such as the Prime Rate Income Trust, is notamong the permissible investments listed. Furthermore, (1) the trust purchasesinvestments which do not meet the criteria of a permitted investment, and (2) theearly withdrawal charges restrict the liquidity of the Town's funds and couldresult in an unnecessary expenditure to cover the penalties imposed should theTown withdraw from the trust before the end of the five-year period.

The investment of Town funds in an investment vehicle that is not among thosepermitted by Minnesota statutes could have been avoided if the Town hadobtained a signed broker certification form from the broker. Minn. Stat.§ 118A.04, subd. 9(b), states:

Prior to completing an initial transaction with a broker, a governmententity shall provide annually to the broker a written statement ofinvestment restrictions which shall include a provision that all futureinvestments are to be made in accordance with Minnesota Statutesgoverning the investment of public funds.

Minn. Stat. § 118A.04, subd. 9(c), provides:

A broker must acknowledge annually receipt of the statement ofinvestment restrictions in writing and agree to handle the governmententity’s account in accordance with these restrictions. Agovernment entity may not enter into a transaction with a brokeruntil the broker has provided this written agreement to thegovernment entity.

This statute became effective on January 1, 1997, and the Office of the StateAuditor has prepared a uniform notification form to be used by all municipalitiesto meet the requirements of this section.

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We recommend that in the future, the Town comply with the provisions of Minn.Stat. §§ 118A.04 and 118A.05. This includes obtaining a signed brokercertification form from each broker prior to investing Town funds through thebroker and investing its funds only in investment vehicles permitted by Minnesotastatutes. We also recommend the Town officials create a plan to divest itself ofits shares of the Prime Rate Income Trust. An appropriate time to divest may bewhen the earnings on the investment exceed the penalty imposed forwithdrawing funds. While monitoring this investment, if it is clear that it is losingprincipal instead of generating income, the need to divest may be immediateregardless of the withdrawal penalty assessed. The amount lost due to thepenalty imposed may be less than the amount lost if the investment is maintainedbeyond the period for which withdrawal penalties are assessed.

Contracting Practices

Towns must comply with Minn. Stat. §§ 471.345 and 365.37 concerningcontracting and bidding. Minn. Stat. § 471.345, subd. 2, defines a contract as“an agreement entered into by a municipality for the sale or purchase of supplies,materials, equipment or the rental thereof, or the construction, alteration, repairor maintenance of real or personal property.”

Under Minn. Stat. § 471.345, if the amount of the contract is estimated toexceed $25,000, the contract must be made pursuant to a formal bid process,including public notice and sealed bids. If the amount of the contract is estimatedto exceed $10,000, but not $25,000, the contract may be made “by directnegotiation, by obtaining two or more quotations . . . when possible. . . .”Smaller contracts may be made either upon quotations or in the open market.

For the period under audit, we noted the following issues related to the Town’scontracting and bidding practices:

- During 1995, payments in total to each of four vendors for different purposes

exceeded the threshold of the range for which either price quotes or sealedbids for the goods or services to be provided should have been obtained. Inthese instances, neither price quotes nor sealed bids were obtained. During1996, identical circumstances occurred with five vendors.

- Minutes to the April 13, 1995, Town Board meeting indicated the Boardreviewed quotes from Hennen’s Dirt Works, Klingberg Trucking, WackerBrothers Construction, and Bryan Rock Products. There was no indication inthe minutes or from any other source as to what project, product, or servicethe quotes accepted were for, the actual amounts quoted, if any otherbusinesses submitted a quote, or who submitted the lowest quote.

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- Minutes to the July 13, 1995, Town Board meeting indicated the Boardauthorized the acceptance of bid documents for the 1995 road improvementproject and that bid opening was scheduled for August 24, 1995. Theminutes of the August 24, 1995, Town Board meeting contained noinformation identifying who submitted bids, the amount of the bids, who wasthe lowest bidder, or to whom the Town Board awarded the contract. All ofthe above-mentioned items should be documented in the minutes of Boardproceedings. The minutes to the September 14, 1995, Town Board meetingindicated that the Board approved, by unanimous vote, the hiring of ValleyPaving, Inc., with a bid of $112,053.50 for the project. No other bids werementioned in the minutes. The minutes do not indicate whether ValleyPaving’s bid or about any other bids submitted, or if Valley Paving was thelowest bidder. We were not able to locate any documentation regarding thebid specifications, the actual bid, a performance bond, or a written contract.The minutes to the November 9, 1995, Town Board meeting indicate that theBoard approved, by unanimous vote, payment of $104,671.29 (95 percentof the cost as recommended by the Township Engineer) to Valley Paving, Inc.Final payment of $5,509.05 was made to Valley Paving during December1996.

We recommend the Town officials review the requirements of Minn. Stat.§§ 365.37 and 471.345. After this review, consideration should be given todevelopment of a detailed contract compliance checklist to be completed for allsignificant contracts to ensure that required documents are obtained and that allapplicable laws are complied with.

Insufficient Collateral Pledged to Secure Town Deposits

On a monthly basis for the audit period 1995 and 1996, we compared the bankbalances of each of the Town's depositories to the Federal Deposit InsuranceCorporation coverage plus the collateral pledged by the banks. During themonths of January, February, June, July, August, and November 1995, andAugust 1996, the Town did not have sufficient depository insurance andcollateral pledged to cover its bank deposits in accordance with Minnesotastatutes. Unsecured deposits expose the Town to a loss should the financialinstitution develop difficulties.

Minn. Stat. § 118.01 required public entities to obtain pledged collateral foramounts on deposit in excess of federal deposit insurance. Minn. Stat. § 118.01,subd. 2, required that the total “collateral computed at its market value shall beat least ten percent more than the amount on deposit at the close of the businessday, in excess of any insured portion. . . .” (See current version at Minn. Stat.§ 118A.03, effective January 1, 1997.)

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We recommend that the Town Treasurer periodically measure the Town's bankbalances against federal deposit insurance and collateral pledged by itsdepositories to determine if its deposits have sufficient coverage. This isespecially important around tax distribution dates, as the Town's deposits arelikely to increase. During such periods, it may be necessary to obtain additionalcollateral to ensure that the requirements of Minnesota statutes are met at alltimes. We also recommend the Town Treasurer maintain complete records of thetypes and amounts of collateral pledged and that all pledged security safekeepingreceipts be kept on file.

Collateral Assignment - Compliance with Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)

The Town did not have documentation demonstrating that it had a perfectedsecurity interest in pledged collateral in compliance with FIRREA, 12 USC§ 1823(e). A 1992 U.S. Court of Appeals decision stated that if a municipalityfails to perfect a security interest under federal law, its right to such collateral inthe event of default is not enforceable. To obtain an enforceable security interestin the collateral, the FIRREA requires the pledging institution’s security agreementor pledge of collateral to meet certain requirements.

We recommend that new assignments of collateral be obtained from the Town'sdepositories. In order to perfect a security interest in the pledged collateral underfederal law, we recommend the Town review assignments to determine that:

- The assignment is in writing (required also by Minn. Stat. § 118A.03,subd. 4).

- The assignment is approved by the depository’s board of directors or loancommittee.

- The assignment of collateral is continuously, from the time of its execution,an official record of the depository.

We also recommend that the Town require its depository institutions to complywith FIRREA and to provide proof of their compliance in the form of a copy of thedepository's board of directors or loan committee resolution. The agreement orpledge should include a list of particular securities pledged at the time of theresolution.

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Transfer of Road and Bridge Fund Monies to Cover Deficiency in Debt Service Fund

During 1995, the Town’s Debt Service Fund did not have sufficient funds tocover the Town’s debt service payment on the $100,000 General ObligationImprovement Bonds, Series 1989A (the Vergus Avenue improvement project).Funds were, in effect, transferred in January 1995 from the Town’s Road andBridge Special Revenue Fund to the Debt Service Fund in the amount of $6,838.There was no discussion or approval of the transfer in the minutes of Town Boardmeetings. The full amount ($20,690) of the balance due on the debt service wasapproved for payment during the January 25, 1995, Town Board meeting whenwarrant (claim) No. 9 was allowed. The Debt Service Fund has never repaid the$6,838 to the Road and Bridge Special Revenue Fund.

Minn. Stat. § 366.04 allows transfers of surplus funds beyond the needs of thecurrent year in a town fund to any other town fund to cover a deficiency,provided there is a unanimous vote by the town board to do so. The OpenMeeting Law, Minn. Stat. § 471.705, requires that the votes of the town boardmembers be recorded. The minutes of the Town Board meetings contain noindication of such approval or indication that the matter was put to a vote in theinstance identified above.

We recommend that the Town Board vote on this transfer. If the Town Board'svote to approve this transfer is not unanimous, these monies must be repaid tothe Town's Road and Bridge Special Revenue Fund from the Debt Service Fund.All future transfers of monies between the Town's funds must meet therequirements of Minn. Stat. § 366.04.

II. INTERNAL CONTROLS

Town Receipting Procedures

The Town Clerk receives checks for building and driveway permits issued. Thesechecks are turned over to the Town Treasurer at the next meeting of the TownBoard. The Town Treasurer is otherwise responsible for receiving, recording, anddepositing the Town's funds. While such concentration of duties andresponsibilities is not desirable from an accounting point of view, this is notunusual in local governmental entities the size of the Town of Spring Lake. Weidentified, however, several problems relative to the manner in which the TownTreasurer performed various duties regarding the Town's receipting proceduresthat are cause for concern. These problems include the lack of timeliness ofdeposits, some receipts not being deposited, and some checks for the Town'smonies not being receipted, recorded, or deposited.

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A. Timeliness of Deposits

During our review of the Town Treasurer's receipting function, we noted thatthe Town Treasurer did not always deposit collections of Town monies on atimely basis. During 1996, numerous collections of Town monies had beenreceipted and recorded by the Town Treasurer but were not deposited withthe Town's banks for months subsequent to their receipt. Examples of someof the most notable delays were as follows:

MonthDeposit Credited Days from

Date Entered Receipt Total of by Bank to Receipt to Deposit on Receipts Numbers Receipts Town’s Account of Town’s Monies

June 13, 1996* 361038 through 361050* $ 132,834.69 August 1996 49

August 7, 1996 361061 36.95 February 1997 178August 8, 1996 361070 through

361085 7,891.25 February 1997 177October 10, 1996 361090 through

361098 8,662.00 February 1997 114November 14, 1996 361099 and

361100 858.05 February 1997 79November 14, 1996 2701 through

2707** 2,962.00** February 1997 79

* Date entered on receipt number 361047 was June 30, 1996. ** Total of receipts amount excludes receipt number 2706 written for $900.00. There was no indication

that this amount was ever deposited.

Delays in depositing the Town's monies with its banks increase the likelihoodthat collections could be misplaced. Such delays also increase the risk ofloss due to theft. Furthermore, when collections are not deposited as soonas they are received, they are not available to earn interest for the Town orfor disbursement.

B. Collections Receipted, Deposits Unknown

During our audit, we found two instances of Town collections receipted bythe Town Treasurer that we were unable to verify had been deposited withthe Town's bank. These instances occurred during August and December1996. Receipt number 361062 in the amount of $40.09 was datedAugust 7, 1996, but we could not trace this receipt to a subsequent calendaryear 1996 deposit to the Town’s checking account. Likewise, receiptsnumbered 2708 through 2718, totaling $7,825.95, could not be traced to asubsequent 1996 deposit to the Town’s checking account.

Once receipts have been written for collections, and the receipts recorded,collections should be deposited with the Town's bank promptly to reduce therisk of loss due to theft and to maximize interest earnings.

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C. Collections Neither Receipted, Recorded, Nor Deposited

During the course of our audit, we found 42 checks payable to the Town thatwere in the possession of the Town Treasurer. These checks were receivedby the Town Treasurer during calendar years 1996 and 1997 and wereneither receipted, recorded into the Town’s records, nor deposited into theTown’s bank account. One check dated during 1996 was in the amount of$10.00. The remaining 41 checks were dated during 1997 and totaled$49,161.00. Also, 31 checks totaling $1,409.17, dated various days during1996 or 1997, payable to the Town for interest earned on certificates ofdeposit, had not been deposited into the Town's account.

The purpose of a receipt is to acknowledge to the payor that the monies havebeen collected, as well as to provide an accounting record of the purpose,date, and amount of the collection. All collections should have writtenreceipts, be recorded, and deposited. By not receipting, recording, anddepositing these collections, the Town Treasurer has not made these moniesavailable to the Town to disburse to pay Town claims, in addition to havinglost the opportunity to earn interest on these funds for the Town had theybeen deposited.

D. Extension of Procedures

In light of the instances identified above where (1) the Town Treasurercollected receipts but we were unable to trace them to subsequent calendaryear 1996 deposits, and (2) we discovered 42 checks payable to the Townin possession of the Town Treasurer that had been neither receipted nordeposited, we extended certain procedures over some of the Town's depositactivity that occurred during calendar years 1997 and 1998. As a result ofapplying these procedures to selected Town deposit and collection activity,we have concluded that the amounts identified above were ultimatelydeposited with the Town's depository during 1997 and 1998.

We recommend the Town Treasurer write receipts for all Town funds at the timesuch funds are received. The receipt forms should be pre-numbered by theprinter and have the name “Town of Spring Lake” pre-printed on them. Thereceipts should be issued in triplicate. The original copy should be given to theperson making the payment, one copy should be given to the Town Clerk, andthe other should remain in the receipt book for the Town Treasurer's records.Receipts should be issued for all types of transactions, including interest ondeposits. The original receipt for payments received by mail need not be mailedto the party making payment, but it should be attached to the supporting papersaccompanying the payment and filed. Receipts should note the method of

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payment, who paid, and completely describe the reason for the payment. Receiptnumbers should be documented on the deposit slips and on the receipts ledgerto ensure accountability for all funds and collections. The receipts should balanceto deposits, and the Town Treasurer should deposit all Town collectionspromptly.

Processing of Claims and Warrants

A review of the Town's disbursements disclosed the following:

- Vendor payments are not always marked “paid” or “canceled” at the time ofpayment to prevent possible intentional or unintentional resubmission forpayment. We also noted little indication that vendor payments hadundergone a clerical check for accuracy of extensions and footing of totals.

- Some claims were paid directly from vendor statements or were not properlyitemized. Vendor statements usually consist of a total only and lack thedetail needed to properly account for and classify the transaction.

- Supporting documentation was not consistently attached to the claim forms.

- Several requests for mileage reimbursements were not itemized with the dateof travel, the exact amount of travel, or the purpose of the travel.

Minn. Stat. § 471.38 provides that “the board or officer authorized by law toaudit and allow claims shall not audit or allow the claim until the person claimingpayment, or the person's agent, reduces it to writing, in items and signs adeclaration to the effect that such account, claim, or demand is just and correctand that no part of it has been paid.” As an alternative to having the claimantsign the declaration on the Town claim form, the Town may have a “declaration”statement printed on the reverse side of the Town's order-check forms inaccordance with Minn. Stat. § 471.391, subd. 2. While the Town's checks dohave a “declaration” statement printed on their reverse side, the claims still needto be in writing and properly itemized.

To improve internal controls over payment of the Town's bills and to comply withMinnesota statutes allowing and paying travel expense claims and other Townclaims, we recommend the following:

- All vendor payments should be marked “paid” or “canceled” at the time ofpayment and initialed by the person checking them for accuracy ofextensions and footing.

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- All claims should be paid from vendor invoices only and be properly itemized.If the original invoice is not available, the Town should request a duplicatecopy of the invoice before approving payment of the claim.

- Documentation in support of the claim should be securely attached to theclaim form.

- All travel claims should document the purpose of the travel. Mileagedocumentation should include the point of departure and the destination.

Order-Check Forms Completed and Authorized But Not Distributed

During our audit, we discovered 13 order-check forms that had been completedand properly authorized for payment, but had not been distributed to the intendedpayees. These checks were found in the Town records maintained by the TownTreasurer. The dates entered on the checks ranged from March 14, 1996, toNovember 13, 1997, and they totaled $8,223.36. Six of the checks were forrefunds of driveway permit deposits and five were for remittances of taxeswithheld from compensation paid. Checks that have been completed andproperly authorized should be distributed to the appropriate payees promptly.Issuing payments within a reasonable time ensures the Town Board that thecharges against the Town have been satisfied. It also reduces the complexity andamount of time it takes to reconcile the Town's checking account.

We recommend that any warrant order-check forms which have been completedand properly authorized for payment be delivered to the intended payeespromptly.

Remittance of Federal Taxes Withheld

Federal FICA and Medicare taxes are withheld from the compensation paid TownBoard members, the Town Clerk, the Town Treasurer, the road overseer, and thepark overseer. One order-check form is completed each month and made payableto the Town's bank for the amount of the taxes withheld. The bank remits thisamount to the federal government. From April through December 1996, thechecks to be distributed to the bank for payment of these taxes were written andapproved, but never deposited with the bank; therefore, the taxes that werewithheld were not paid. None of the checks written for this purpose during thetime period of April through December 1996, in amounts totaling $3,305.24,cleared the bank. Five of these checks, in amounts totaling $1,948.60, haddates on them ranging from August to December 1996. They were five of the13 order-check forms which were completed and authorized but not distributed(see previous comment). Remittances to the bank by the Town for the amount

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of federal taxes withheld from January through September 1997 were not madeuntil September 1997. The Town still has made no payment for taxes withheldfrom compensation it paid April through December 1996. Federal taxes withheldfrom compensation paid must be remitted to the federal government. Failure toremit withholdings to the proper agencies on time may cost the Town penaltiesand interest.

An informational notice from the U.S. Department of the Treasury, InternalRevenue Service, to Spring Lake Township regarding “1995 Federal Tax DepositRequirements for Monthly Depositors,” states “for wages paid afterDecember 31, 1994, you should make your deposits following the monthlyschedule . . . following this schedule, your deposits for any given month are dueon or before the 15th day of the following month.”

We recommend Town officials contact the Internal Revenue Service and seek itsadvice as to what needs to be done for the taxes that were withheld but notremitted. The Town should also review its processes for withholding, remitting,and reporting payroll taxes and correct them as necessary to ensure that theTown's procedures handle these items properly in the future and avoid penaltiesand interest.

Reconciliations of Bank Statements

Our initial examination of the Town's 1996 bank statements from Prior Lake StateBank revealed that the account had not been reconciled by the Town's officerssince May 1996. During the course of our audit, we deemed it necessary toperform the reconciliations and we used the form provided on the back of thebank statement to assist us. While performing these reconciliations, wediscovered that the Town had 18 outstanding order-checks as of December 31,1996, five of which had been outstanding for more than one year. One check,in the amount of $500.00, was dated October 13, 1994, and there were fourchecks, totaling $3,816.00, that were dated during 1995. Having outstandingchecks on the bank reconciliations for that period of time also made thereconciliations cumbersome and overly complicated.

Monthly bank reconciliations are a basic element to providing assurance of theaccuracy of transactions recorded on the Town's books, and they are essentialto verify the accuracy of other cash procedures. Without them, Town officialscannot know whether their records are correct. Failing to perform monthlyreconciliations leads to an increased risk of errors.

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Pursuant to Minn. Stat. § 345.38, intangible personal property, includingoutstanding checks, held for an owner by a political subdivision is presumedabandoned if it has remained unclaimed by the owner for more than three years.Funds unclaimed after three years must be turned over to the State of Minnesota,in accordance with Minn. Stat. §§ 345.38-.43.

We recommend the Town officers reconcile bank statements on a monthly basis.We also recommend that Town officers investigate checks outstanding for morethan one year to determine why they remain outstanding. If the payee does notcash the check or requests a duplicate, the old check should be canceled andreturned to the Town fund from which it was issued. The Town should complywith Minn. Stat. §§ 345.38-.43.

Voided Order-Check Forms Not Retained

During our audit of the Town’s disbursements, we noted that some order-checkforms had been written but appeared to have been voided or canceled prior totheir issuance to the intended parties. In 1995 there were three such checks andin 1996 there were seven. We were unable to locate these checks in the Town'srecords and we believe the Town's officers did not retain them. When voids arenot retained, it is not possible to determine whether all checks from the accounthave been accounted for, since no proof exists that the check has not beenissued.

We recommend that the Town retain voided order-check forms after they havebeen sufficiently canceled. Canceling the order-check form should includevoiding the face of the form and its stub to prevent any subsequent reuse, andcutting out and destroying the signature area. The remainder of the voided order-check form should be retained along with other Town documents so that theTown can account for all checks.

Segregation of Duties

The limited number of Town officials prevents the segregation of accountingfunctions necessary to ensure adequate internal accounting control. Thissituation is not unusual in local governments the size of the Town of Spring Lake.The Town's Board of Supervisors and its officers should constantly be aware ofthis condition and realize that the concentration of duties and responsibilities ina limited number of individuals is not desirable from an internal control point ofview.

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Generally, segregation of duties can be implemented with the hiring of additionalpersonnel; however, this becomes a significant cost consideration to localgovernments such as the Town of Spring Lake. Under the above conditions, themost effective system of control lies in the knowledge of the Board and Townofficers regarding the Town's operations and the periodic review of thoseoperations.

III. MANAGEMENT PRACTICES

Approval of Warrants at Town Board Meetings

At the monthly Town Board meetings, Town claim forms and order-check formsare approved and signed by three individuals. These individuals are the Chair ofthe Town Board, the Town Clerk, and the Town Treasurer. During our review ofthe minutes to the proceedings of the monthly Town Board meetings, we notedseveral instances in which only a series of Town claim form numbers were listedas warrants either “issued” or “approved” during the meeting. The correspondingclaim forms would have the order-check form number indicated on it. There weresome minutes of Town Board meetings which did not include any series of claimsand, consequently, which order-checks, if any, were approved at the meeting.

Minn. Stat. § 366.21 (4), states that it is the duty of the board of audit (that isthe Town Board) “to report in detail the items of accounts audited and allowedor disallowed, the nature of each, and the person to whom allowed ordisallowed.” When indicating in the minutes which Town claims have beenapproved and, consequently, which order-checks are to be issued, an itemizedlist detailing the vendor, the reason for payment, the dollar amount, and theorder-check number should be included to satisfy this requirement.

We recommend that the minutes to the proceedings of the monthly Town Boardmeetings provide the required detail as to the claims approved and order-checksissued.

Driveway Permit Deposits Held by Town

The Town charges permit fees for driveway construction permits. These permitsare issued by the Town Clerk who also collects the permit fee. The Town Clerkturns these collections over to the Town Treasurer. A portion of the permit feeis to cover the cost of the engineer's inspection of the driveway and theremainder of the fee is placed in an escrow account, the accounting of which isthe responsibility of the Town Treasurer. A Town order-check is issued to thepermittee to refund the remaining portion of the permit fee after completion of

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final inspection of the driveway. The collections of the permit fees and thechecks issued back to the permittee are accounted for in the Town's Road andBridge Special Revenue Fund. There were no reconciliations performed by theTown's officers between the balance of these monies collected and paid out.During our audit of the Town's disbursements, we attempted to track refunds ofdriveway permits back to the original payment for the permit but, in someinstances, we were unsuccessful in doing so. When a full or partial refund ismade from a payment received in the past, the Town should maintain a separateaccounting of the payments made and refunded, in addition to recording each inthe receipts and disbursements journals.

We recommend that the Town maintain a separate accounting for drivewaypermits using pre-numbered permits so as to better identify them. The separateaccounting could be as simple as entering each pre-numbered permit issued intoa spreadsheet with name, address, date permit is issued, amount collected,receipt number, and date of deposit. When the Town order-check for therefundable portion is issued, this could be noted next to the issuing information.Refund information could include date of final inspection, date of refund, amountof refund, and check number refund was issued on. This information would alsobe useful for performing, at least on an annual basis, reconciliations between thebalances of permit monies collected and paid out. This information will aid theTown in determining when inspections may need to be performed. Since thereis no expiration date for the permit, this separate accounting will give the Townan idea of how long it has been since the permit has been issued. We realize thatnot all permittees may be entitled to a refund, but if the driveway did not passinspection and no refund will be issued, this could also be noted. An indicationof progress of the driveway could also be noted.

Board Member Per Diem Payment for Meetings

Members of the Town Board receive per diem payments for attendance at variousmeetings of other organizations. The minutes of the Town Board meetings do notindicate whether the Board gave approval for its members to attend thesemeetings and receive per diem reimbursement. Town Board members present aclaim for a per diem payment for approval with other Town bills after theirattendance at these meetings.

We recommend that assignments by the Town Board to its members to attendmeetings of outside organizations be approved in advance by the Board. Further,members attending such meetings should report to the Board in the minutes ofthe next meeting.

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Items to be Regularly Addressed by Town Board

During our review of the financial records of the Town, we noted during 1995and 1996, the Town Clerk and the Town Treasurer received reimbursement formileage at a rate of $.29 per mile. The reimbursement rate specified at the TownBoard's organizational meetings for 1995 and 1996 relate back to amounts setin 1992 which was $.28 per mile. Mileage should be reimbursed only at thestated rate. Further, for this time period, we were unable to find any Town Boardresolutions designating a depository for Town funds. During the annual Townmeeting held March 9, 1992, a motion was carried “to keep checking at PriorLake State Bank and continue to use other banks as the Treasurer deems best.”

Minn. Stat. § 367.05 states that the town board shall set the compensation fortown offices and the rate of mileage reimbursement. Further, Minn. Stat.§ 118.005 (now § 118A.02) indicates that the town board is to designate thedepository of town funds. The town board may delegate this designationfunction to its treasurer. Neither of these statutes states how often the board isto undertake these activities, but in circumstances where the town board isdesignating a bank as the depository of town money, the designation may notextend beyond their official term. (Minn. Stat. § 366.01, subd. 4.) Regularlyaddressing these issues in the form of board resolutions avoids confusion and,in the case of compensation and reimbursement, ensures uniform rates ofpayment.

We recommend that the Town Board annually or biennially set or reaffirm thecompensation, per diems, and mileage reimbursement for Town officers andemployees. Further, we recommend that, on an annual basis, the Town Boarddesignate the depositories for Town funds. The Town should, at the time it isdesignating the depositories, obtain new pledge agreements and other documentsnecessary to perfect a security interest in collateral pledged by the depositories.

Budgeted Expenditure of Tax Levy Monies

State law requires a town board and the board of audit to prepare annual budgets(Minn. Stat. §§ 275.065 and 366.21). In the past, the Board has not made orapproved a detailed budget of expenditures to be made by the Town at the timethe Town’s tax levy was discussed and approved at the annual Town meeting.As a result, there has been insufficient documentation to provide accountabilityas to how tax levy funds were to be raised and spent by the Town during thefollowing year.

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A budget is essential because it sets the constraints within which the Town Boardmust operate, it allows the Town Board to allocate money on the basis ofpriorities, and it provides a tool to measure actual expenditures during the year.Furthermore, a budget is a plan of financial operation which includes an estimateof proposed expenditures for a given period of time and the proposed means offinancing them.

We recommend the Town Board prepare detailed expenditure budgets for eachof the Town's funds to go along with the tax levy at the time the tax levy ispresented at the annual Town meeting. The detailed expenditure budgets shouldbe designed to accommodate amounts estimated to be spent for all the functions,activities, and services provided by the Town, such as road projects, constructionprojects, the fire protection contract, officers' salaries and per diems, and otherexpenditures which can be reasonably estimated. We also recommend thatestimates of other revenues, for example, interest earnings on investments, beprepared. What amount, if any, of the funding requirements that could befinanced from funds on hand, thereby reducing the tax levy, should also bedetermined. This is an important consideration because a town cannot contractdebts or spend more money in a year than the taxes levied for the year withouta favorable vote of a majority of the Town's electors. Stated another way, onlythe Town's electors can decide to spend an amount in excess of the authorizedlevy.

All budgetary documentation should be centralized and retained to provide a moreefficient and effective means of budgetary monitoring. Monitoring activitiesshould be performed on a regular basis. Periodically throughout the fiscal year,the Town Clerk should compare the actual revenues and expenditures against theestimates of the approved budget and report this information to the Town Board.This allows the Town Board to adjust budgeted amounts, if necessary.

Minutes of Monthly Town Board Meetings

During the course of our audit, we reviewed the minutes to the proceedings ofthe monthly Town Board meetings for the years under audit. In many instances,the minutes provide an inadequate history of the meetings involved.

Various statutes that refer to taking or publishing minutes use the term“proceedings” or “official proceedings.” The Minnesota Attorney General hasused the definition of "proceedings" found at Minn. Stat. § 331A.01, subd. 6, inanalyzing the clerk's duties to take minutes. This statute states, in part:

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“Proceedings” means the substance of all official actions taken by thegoverning body of a local public corporation at any regular or specialmeeting, and at minimum includes the subject matter of a motion, thepersons making and seconding a motion, the roll call vote on a motion,the character of resolutions or ordinances offered, including a briefdescription of their subject matter, and whether defeated or adopted.

At a minimum, the minutes must include the information required by Minn. Stat.§ 471.705 [Open Meeting Law]. This provision requires that the individual votesof each member of the governing body on “any action” be specifically recordedexcept for votes on “payments of judgments, claims and amounts fixed bystatute.”

If the minimum requirements are satisfied, the question of how elaborate andextensive the minutes should be is largely a policy matter for determination by theparticular body in the exercise of reasonable judgment and discretion. TheAttorney General has explained:

. . . there may be circumstances in which it would be advisable for thetown board to provide for the minutes to include information over andabove what is necessary to satisfy minimum statutory requirements fora record of its official actions. Op. Atty. Gen. 851-C (March 5, 1992).

Such circumstances may include meetings where the Board is acting in a judicialcapacity, such as when it reviews requests for variances or special use permits.At such times, the minutes may include the Board's reasons for reaching aparticular decision. Such minutes could be crucial in defending a court challengeto the decision.

While the following is not an exhaustive list, some specific items that should beincluded in the minutes to the proceedings of Town Board meetings are:

- type of meeting (regular, special, adjourned regular, adjourned special,recessed, and emergency);

- whether meeting is a Town Board or Commission meeting;

- date and place meeting was held;

- the time meeting was called to order;

- list of Town Board members present and absent;

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- approval of minutes to previous meeting, with any corrections noted;

- appointments of representatives to committees, outside organizations;

- reports of the officers;

- authorizations and directions to invest excess funds, information oninvestment redemptions and maturities;

- list of all sealed bids received or price quotations obtained;

- identity of parties to whom contracts were awarded;

- abstentions from voting due to a conflict, and the Board member's name andreason for the abstention;

- reasons the Town Board determines to award a particular contract to a bidderother than the lowest bidder;

- granting of variances or special use permits;

- listing of all bills (including per diems) allowed or approved for payment,noting the order-check number, claimant, purpose, and amount;

- transfers of funds; and

- reason the meeting was concluded and the time the meeting concluded.

The minutes should be signed by the Town Clerk and attested to by a Boardmember, preferably the Chair, at the time the minutes are adopted by the Board,usually at the next meeting. We believe that by following the above guidance,the Town will provide a more adequate history of its meetings.

Other Contracting Issues

The following issues related to contracting were also identified:

- Many contracts let over the course of the audit period were not accompaniedby written agreements. For example, the minutes to the June 8, 1995, TownBoard meeting indicated the Board hired Len Olson as Township Engineer at$56 per hour. No other information was available as to what service hewould be providing or for how long. Between 1995 and 1996, amounts paid

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to him totaled $5,947.30. Though this dollar amount or type of service doesnot require competitive bidding, sound management practices would requirewritten contracts for all contracts over a certain amount.

- The Town has no clear policy that designates any Town official or officer asresponsible for soliciting quotations for services such as road plowing, roadmaintenance, and ditch mowing. Furthermore, there is confusion regardingresponsibility for various tasks in the contracting and bidding process whichincreases the possibility that state statutes on purchasing, bidding, andbonding requirements may not be followed correctly. It is also a potentialsource for conflicts of interest.

Elsewhere in this report, we recommended the Town officials review therequirements of Minn. Stat. §§ 365.37 and 471.345, and that they considerdeveloping a detailed contract compliance checklist to be completed for allsignificant contracts. To minimize confusion regarding the responsibility forensuring that state contracting requirements are followed, we also recommendthe Town designate an individual to be responsible for the various tasks relatedto the contracting and bidding process. These tasks include soliciting quotations,monitoring the progress of projects, and anticipating possible cost overruns.

Town officials need to maintain necessary documentation in contract files. Wesuggest the files include, at a minimum, the following:

- bid specifications

- affidavits of publication for bid

- bid abstracts, quotes, or proposals

- original contracts and change orders

- performance bonds

- contractor's certification of income tax withheld

- payment summaries, referenced to minutes approving payment on the claim

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The Town's designee should verify that all proper documents have been receivedprior to the start of a contract and recommending final payment on the contract.The Town's designee should also maintain all necessary documents related toeach contract in one location. The General Records Retention Schedule forTownships, issued by the Minnesota Department of Administration, containsdetailed requirements as to how long such documentation is to be held.

Accounting System

Considerable amount of time was spent by the auditors in classifying andsummarizing the accounting transactions in order to report the information in theTown's financial statements.

The following items caused the accounting system to be ineffective andinefficient:

- Receipts were not written for all monies received.

- A receipts register and receipts ledger were not properly maintained.

- Claim for payment forms were not used properly.

- Order-checks could have included more information to make them moreefficient.

- A disbursement ledger with proper account classifications was notmaintained.

- Claims by vendor were not summarized.

We recommend the Town adopt the procedures and forms as described in theAccounting Manual for Small Cities and Towns in Minnesota. This system canimmediately provide financial information to the Town Board and the Townofficers concerning receipts or revenues, disbursements or expenditures,comparisons to budget, and cash balances. The information is available on ledgeraccounts for immediate reference or for the preparation of interim financialstatements and year-end financial statements. This system could becomputerized very readily. In addition, we make the following recommendations:

- Receipts should be in triplicate and pre-numbered by the printer with theTown's name on them. A receipt must be written for all collections.

- A receipts register and ledger should be properly maintained.

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- Claim for payment forms should be prepared for all claims. A list of theapproved claims should be recorded in the minutes.

- A two-part order-check should be used with a copy attached to the approvedclaim. A detachment to the order-check could be used to record informationsuch as invoice number.

- A disbursement ledger should be established with accounts in accordancewith a chart of accounts. Each account should have an approved budgetamount.

- A vendor ledger should be maintained which lists payments to each vendor.

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REPORT ON THE INTERNAL CONTROLS AND COMPLIANCE

Town Board of SupervisorsTown of Spring Lake

We have audited the cash basis financial statements of the Town of Spring Lake asof and for the years ended December 31, 1995 and 1996, and have issued our reportthereon dated March 31, 1998. Except as discussed in the following paragraph, weconducted our audit in accordance with generally accepted auditing standards.

We were unable to obtain adequate support for disbursements made by the Town ofSpring Lake in 1995 and 1996. For the year ended December 31, 1995,documentation to support 81.44 percent of the Town's monies disbursed wasunavailable for testing. For the year ended December 31, 1996, documentation wasunavailable to support 10.60 percent of the Town's monies disbursed. The dollarvalue for the unsupported disbursements was $299,175 and $26,462 in 1995 and1996, respectively.

Internal Controls Over Financial Reporting

The Town's Board of Supervisors and its officers are responsible for establishing andmaintaining internal controls. In fulfilling this responsibility, the Town's Board ofSupervisors and its officers must make estimates and judgments that assess theexpected benefits and related costs of internal control policies and procedures. Theobjectives of internal controls are to provide the Town's Board of Supervisors and itsofficers with reasonable, but not absolute, assurance that:

- assets are safeguarded against loss from unauthorized use or disposition,- transactions are executed in accordance with the Town Board's authorization, and- transactions are recorded properly to permit the preparation of cash basis financial

statements.

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Because of inherent limitations in internal controls, errors or irregularities may occurand not be detected. Also, projection of any evaluation of the controls to futureperiods is subject to the risk that procedures may become inadequate because ofchanges in conditions or that the effectiveness of the design and operation of policiesand procedures may deteriorate.

In planning and performing our audit, we considered the Town of Spring Lake'sinternal control over financial reporting in order to determine our auditing proceduresfor the purpose of expressing our opinion on the financial statements and not toprovide assurance on the internal control over financial reporting. However, we notedcertain matters involving the internal control over financial reporting and its operationthat we consider to be reportable conditions. Reportable conditions involve matterscoming to our attention relating to significant deficiencies in the design or operationof the internal control over financial reporting that, in our judgment, could adverselyaffect the Town's ability to record, process, summarize, and report financial dataconsistent with the assertions of the Town's Board of Supervisors and its officers inthe financial statements. Reportable conditions are described in the accompanyingSchedule of Findings and Recommendations, Section II - Internal Controls.

A material weakness is a reportable condition in which the design or operation of oneor more of the internal control components does not reduce to a relatively low levelthe risk that misstatements in amounts that would be material in relation to thefinancial statements being audited may occur and not be detected within a timelyperiod by the Town's Board of Supervisors and its officers in the normal course ofperforming their assigned functions. Our consideration of the internal control overfinancial reporting would not necessarily disclose all matters in the internal controlthat might be reportable conditions and, accordingly, would not necessarily discloseall reportable conditions that are also considered to be material weaknesses.However, we consider all the reportable conditions described in the Schedule ofFindings and Recommendations to be material weaknesses.

Management Practices

As part of our financial statement audit, we also reviewed certain managementpractices. Our review was not a detailed study of every system, procedure, andtransaction. Accordingly, the items presented in the accompanying Schedule ofFindings and Recommendations, Section III - Management Practices, may not beall-inclusive of areas where improvements may be needed.

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Minnesota Legal Compliance

Except as discussed in the following paragraph, we conducted our audit inaccordance with generally accepted auditing standards and the provisions of theMinnesota Legal Compliance Audit Guide for Local Government, promulgated by theLegal Compliance Task Force pursuant to Minn. Stat. § 6.65. Accordingly, the auditincluded such tests of the accounting records and such other auditing procedures aswe considered necessary in the circumstances.

We were unable to obtain adequate support for disbursements made by the Town ofSpring Lake in 1995 and 1996. For the year ended December 31, 1995,documentation to support 81.44 percent of the Town's monies disbursed wasunavailable for testing. For the year ended December 31, 1996, documentation wasunavailable to support 10.60 percent of the Town's monies disbursed. The dollarvalue for the unsupported disbursements was $299,175 and $26,462 in 1995 and1996, respectively.

The Minnesota Legal Compliance Audit Guide for Local Government contains fivemain categories of compliance to be tested: contracting and bidding, deposits andinvestments, conflicts of interest, public indebtedness, and claims and disbursements.Our study included all of the listed categories.

In addition, we also reviewed for compliance with other statutes, bylaws,administrative rules, and state grant regulations and contracts that we deemednecessary. This review did not include all possible regulatory provisions which maybe applicable, and was not intended to provide assurance of full compliance with allregulatory provisions.

The results of our tests indicate that for the items tested, the Town of Spring Lakecomplied with the material terms and conditions of applicable legal provisions, exceptas described in the accompanying Schedule of Findings and Recommendations,Section I - Compliance. Further, for the items not tested, based on our audit and theprocedures referred to above, nothing came to our attention to indicate that the Townhad not complied with such legal provisions.

* * * * *

This report is intended for the information of the Town Board of Supervisors.However, this report is a matter of public record and its distribution is not limited.

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The Special Investigations Division of the State Auditor’s Office completed its reviewof certain issues relating to the Town of Spring Lake and forwarded those issues tothe Scott County Attorney’s Office on March 19, 1998, for review and potentialprosecution.

We are available throughout the year to assist you in implementing any of oursuggestions.

JUDITH H. DUTCHER GREG HIERLINGER, CPASTATE AUDITOR DEPUTY STATE AUDITOR

March 31, 1998