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Home My WebLink About2020 Financial Statements CITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA Financial Statements and Supplemental Information Year Ended December 31, 2020 THIS PAGE INTENTIONALLY LEFT BLANK Page INTRODUCTORY SECTION CITY COUNCIL AND OTHER OFFICIALS 1 FINANCIAL SECTION INDEPENDENT AUDITOR’S REPORT 2–3 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements Statement of Net Position 4 Statement of Activities 5–6 Fund Financial Statements Governmental Funds Balance Sheet 7–8 Reconciliation of the Balance Sheet to the Statement of Net Position 9 Statement of Revenue, Expenditures, and Changes in Fund Balances 10–11 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities 12 Statement of Revenue, Expenditures, and Changes in Fund Balances – Budget and Actual – General Fund 13 Proprietary Funds Statement of Net Position 14 Statement of Revenue, Expenses, and Changes in Net Position 15 Statement of Cash Flows 16 Notes to Basic Financial Statements 17–28 OTHER REQUIRED REPORTS Independent Auditor’s 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 29–30 Independent Auditor’s Report on Minnesota Legal Compliance 31 Schedule of Findings and Responses 32–34 CITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA Table of Contents THIS PAGE INTENTIONALLY LEFT BLANK INTRODUCTORY SECTION THIS PAGE INTENTIONALLY LEFT BLANK -1- Gretchen Artig-Swomley Mayor Leonard Cacioppo Councilmember Laurel Hyney-Amlee Councilmember Faith Kuny Councilmember James Lindner Councilmember Gloria Tessier City Clerk Tom Kelly City Treasurer Ben Johnson Planning Commission Chair CITY COUNCIL OTHER OFFICIALS CITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA City Council and Other Officials as of December 31, 2020 THIS PAGE INTENTIONALLY LEFT BLANK FINANCIAL SECTION THIS PAGE INTENTIONALLY LEFT BLANK -2- INDEPENDENT AUDITOR’S REPORT To the City Council and Management City of Gem Lake, Minnesota REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the governmental activities, the business -type activities, and each major fund of the City of Gem Lake, Minnesota (the City) as of and for the year ended December 31, 2020, 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 of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 of the 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. (continued) C E R T I F I E D A C C O U N T A N T S P UBLIC PRINCIPALS Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA/CMA Jaclyn M. Huegel, CPA Kalen T. Karnowski, CPA Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 -3- OPINIONS In our opinion, the financial statements referred to on the previous page present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, and each major fund of the City as of December 31, 2020, and the respective changes in financial position, and, where applicable, cash flows thereof, and the budgetary comparison for the General Fund for the year then ended in accordance with accounting principles generally accepted in the United St ates of America. OTHER MATTERS Required Supplementary Information Management has omitted the management’s discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financi al 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. Our opinion on the basic financial statements is not affected by this missing information. 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, as listed in the table of contents, is presented for purposes of additional analysis and is a not required part of the basic financial statements. The introductory section has not been subjected 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 it. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated June 22, 2021 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s 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’s internal control over financial reporting and compliance. Minneapolis, Minnesota June 22, 2021 BASIC FINANCIAL STATEMENTS THIS PAGE INTENTIONALLY LEFT BLANK Governmental Business-Type Activities Activities Total Assets Cash and investments 1,002,597$ 400,543$ 1,403,140$ Receivables Accounts 1,706 34,833 36,539 Accrued interest 1,715 860 2,575 Property taxes 15,497 – 15,497 Special assessments 835,471 – 835,471 Due from other governments 2,356 75 2,431 Prepaid items 1,137 3,237 4,374 Capital assets Not being depreciated 11,353 – 11,353 Depreciated, net of accumulated depreciation 1,509,659 1,291,806 2,801,465 Total assets 3,381,491$ 1,731,354$ 5,112,845$ Liabilities Accounts and contracts payable 39,156$ 8,633$ 47,789$ Accrued interest payable 14,669 – 14,669 Due to other governments 4,395 8,714 13,109 Accrued salaries payable 750 – 750 Deposits payable 14,693 – 14,693 Unearned revenue 1,900 – 1,900 Long-term liabilities Amounts due in one year 95,000 – 95,000 Amounts due in more than one year 1,081,081 – 1,081,081 Total liabilities 1,251,644 17,347 1,268,991 Net position Net investment in capital assets 344,931 1,291,806 1,636,737 Restricted for debt service 720,402 – 720,402 Restricted for park improvements 44,694 – 44,694 Unrestricted 1,019,820 422,201 1,442,021 Total net position 2,129,847 1,714,007 3,843,854 Total liabilities and net position 3,381,491$ 1,731,354$ 5,112,845$ CITY OF GEM LAKE Statement of Net Position December 31, 2020 See notes to basic financial statements -4- Operating Capital Charges for Grants and Grants and Functions/Programs Expenses Services Contributions Contributions Governmental activities General government 164,991$ 21,280$ 8,778$ 754$ Public safety 106,319 – – – Public works 115,405 19,054 – 24,004 Conservation and development 59,270 – 1,095 – Interest and fiscal charges 40,984 – – – Total governmental activities 486,969 40,334 9,873 24,758 Business-type activities Water 73,975 16,042 – – Sewer 60,903 61,943 – – Total business-type activities 134,878 77,985 – – Total 621,847$ 118,319$ 9,873$ 24,758$ General revenues Property taxes General purposes Debt service Grants and contributions not restricted Investment earnings Other Total general revenues Change in net position Net position – beginning of year Net position – end of year Program Revenues CITY OF GEM LAKE Statement of Activities Year Ended December 31, 2020 See notes to basic financial statements -5- Governmental Business-Type Activities Activities Total (134,179)$ –$ (134,179)$ (106,319) – (106,319) (72,347) – (72,347) (58,175) – (58,175) (40,984) – (40,984) (412,004) – (412,004) – (57,933) (57,933) – 1,040 1,040 – (56,893) (56,893) (412,004) (56,893) (468,897) 458,710 – 458,710 84,880 – 84,880 12 – 12 11,501 5,831 17,332 379 – 379 555,482 5,831 561,313 143,478 (51,062) 92,416 1,986,369 1,765,069 3,751,438 2,129,847$ 1,714,007$ 3,843,854$ Net (Expense) Revenue and Changes in Net Position -6- G.O. Capital G.O. Capital Improvement Improvement Plan Bonds Plan Bonds Hoffman General Series 2007A Series 2018A Road Assets Cash and investments 294,991$ 127,286$ 77,442$ –$ Receivables Accounts 1,706 – – – Accrued interest 1,252 181 34 – Property taxes Current 13,121 2,252 111 – Delinquent 11 2 – – Special assessments Current 490 – 40,678 – Deferred – – 488,137 – Due from other governments 2,356 – – – Prepaid items 1,137 – – – Total assets 315,064$ 129,721$ 606,402$ –$ Liabilities Accounts and contracts payable 29,638$ 576$ 476$ –$ Due to other governments 4,395 – – – Accrued salaries payable 750 – – – Deposits payable 14,693 – – – Unearned revenue 1,900 – – – Total liabilities 51,376 576 476 – Deferred inflows of resources Unavailable revenue 501 2 523,287 – Fund balances Nonspendable 1,137 – – – Restricted for debt service – 129,143 82,639 – Restricted for park improvements – – – – Assigned for capital improvements – – – – Unassigned 262,050 – – – Total fund balances 263,187 129,143 82,639 – Total liabilities, deferred inflows of resources, and fund balances 315,064$ 129,721$ 606,402$ –$ CITY OF GEM LAKE Balance Sheet Governmental Funds December 31, 2020 See notes to basic financial statements -7- Scheuneman Street Parks and Total Road Improvements Playgrounds Governmental –$ 458,289$ 44,589$ 1,002,597$ – – – 1,706 – 143 105 1,715 – – – 15,484 – – – 13 – 35,199 – 76,367 – 270,967 – 759,104 – – – 2,356 – – – 1,137 –$ 764,598$ 44,694$ 1,860,479$ –$ 8,466$ –$ 39,156$ – – – 4,395 – – – 750 – – – 14,693 – – – 1,900 – 8,466 – 60,894 – 304,129 – 827,919 – – – 1,137 – – – 211,782 – – 44,694 44,694 – 452,003 – 452,003 – – – 262,050 – 452,003 44,694 971,666 –$ 764,598$ 44,694$ 1,860,479$ -8- THIS PAGE INTENTIONALLY LEFT BLANK Total fund balances – governmental funds 971,666$ Capital assets used in governmental activities are not financial resources and,therefore,are not reported as assets in governmental funds. Cost of capital assets 2,495,213 Less accumulated depreciation (974,201) Certain revenues (including taxes and special assessments)are included in net position,but are excluded from fund balances until they are available to liquidate liabilities of the current period.827,919 Long-term liabilities,including bonds payable,are not due and payable in the current period and, therefore, are not reported in the governmental funds. Bonds payable (1,160,000) Unamortized bond premiums (16,081) Interest on long-term debt is included in the change in net position as it accrues,regardless of when payment is due. However, it is included in the change in fund balances when due.(14,669) Total net position – governmental activities 2,129,847$ Amounts reported for governmental activities in the Statement of Net Position are different because: December 31, 2020 CITY OF GEM LAKE Reconciliation of the Balance Sheet to the Statement of Net Position Governmental Activities See notes to basic financial statements -9- G.O. Capital G.O. Capital Improvement Improvement Plan Bonds Plan Bonds Hoffman General Series 2007A Series 2018A Road Revenue Property taxes 472,092$ 80,842$ 4,038$ –$ Special assessments 754 – 74,548 – Intergovernmental 9,885 – – – Licenses and permits 31,439 – – – Fines and forfeitures 620 – – – Charges for services 1,662 – – – Investment earnings 8,476 1,214 200 – Facility rental 3,594 – – – Miscellaneous 3,019 – 379 – Total revenue 531,541 82,056 79,165 – Expenditures Current General government 141,395 – – – Public safety 106,319 – – – Public works 48,720 – – – Conservation and development 57,187 – – – Capital outlay – – – – Debt service Principal – 60,000 30,000 – Interest and fiscal charges – 17,815 25,751 – Total expenditures 353,621 77,815 55,751 – Excess (deficiency) of revenue over expenditures 177,920 4,241 23,414 – Other financing sources (uses) Transfers in – – – 232,018 Transfers (out)(410,000) – – – Total other financing sources (uses)(410,000) – – 232,018 Net change in fund balances (232,080) 4,241 23,414 232,018 Fund balances (deficit) Beginning of year 495,267 124,902 59,225 (232,018) End of year 263,187$ 129,143$ 82,639$ –$ CITY OF GEM LAKE Statement of Revenue, Expenditures, and Changes in Fund Balances Governmental Funds Year Ended December 31, 2020 See notes to basic financial statements -10- Scheuneman Street Parks and Total Road Improvements Playgrounds Governmental –$ –$ –$ 556,972$ – 42,003 – 117,305 – – – 9,885 – – – 31,439 – – – 620 – – – 1,662 – 901 710 11,501 – – – 3,594 – – – 3,398 – 42,904 710 736,376 – – – 141,395 – – – 106,319 – – – 48,720 – – 1,333 58,520 – 8,961 – 8,961 – – – 90,000 – – – 43,566 – 8,961 1,333 497,481 – 33,943 (623) 238,895 2,210 175,772 – 410,000 – – – (410,000) 2,210 175,772 – – 2,210 209,715 (623) 238,895 (2,210) 242,288 45,317 732,771 –$ 452,003$ 44,694$ 971,666$ -11- THIS PAGE INTENTIONALLY LEFT BLANK Total net change in fund balances – governmental funds 238,895$ Capital outlays are reported in governmental funds as expenditures.However,in the Statement of Activities,the cost of those assets is allocated over the estimated useful lives as depreciation expense. Capital outlays 8,853 Depreciation expense (90,923) Certain revenues (including taxes and special assessments)are included in the change in net position,but are excluded from the change in fund balances until they are available to liquidate liabilities of the current period.(105,929) Repayment of bond principal is an expenditure in the governmental funds,but reduces long-term liabilities in the Statement of Net Position. 90,000 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. Amortization of bond premiums 1,282 Accrued interest 1,300 Change in net position – governmental activities 143,478$ Amounts reported for governmental activities in the Statement of Activities are different because: CITY OF GEM LAKE Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities Governmental Activities Year Ended December 31, 2020 See notes to basic financial statements -12- THIS PAGE INTENTIONALLY LEFT BLANK Original and Over (Under) Final Budget Actual Final Budget Revenue Taxes Property taxes 451,088$ 472,092$ 21,004$ Franchise fees 6,000 – (6,000) Special assessments – 754 754 Intergovernmental 19,300 9,885 (9,415) Licenses and permits 30,350 31,439 1,089 Fines and forfeitures 1,200 620 (580) Charges for services 4,700 1,662 (3,038) Investment earnings 2,500 8,476 5,976 Facility rental 3,000 3,594 594 Miscellaneous 1,000 3,019 2,019 Total revenue 519,138 531,541 12,403 Expenditures Current General government 181,379 141,395 (39,984) Public safety 106,680 106,319 (361) Public works 107,979 48,720 (59,259) Conservation and development 63,100 57,187 (5,913) Capital outlay 5,000 – (5,000) Total expenditures 464,138 353,621 (110,517) Excess of revenues over expenditures 55,000 177,920 122,920 Other financing (uses) Transfers (out)(55,000) (410,000) (355,000) Net change in fund balances –$ (232,080) (232,080)$ Fund balances Beginning of year 495,267 End of year 263,187$ CITY OF GEM LAKE General Fund Statement of Revenue, Expenditures, and Changes in Fund Balances – Budget and Actual Year Ended December 31, 2020 See notes to basic financial statements -13- Water Sewer Total Assets Current assets Cash and investments –$ 400,543$ 400,543$ Receivables Accounts 3,531 31,302 34,833 Accrued interest – 860 860 Due from other funds – 76,496 76,496 Due from other governments – 75 75 Prepaid items – 3,237 3,237 Total current assets 3,531 512,513 516,044 Noncurrent assets Capital assets Infrastructure 734,262 813,678 1,547,940 Less accumulated depreciation (48,371) (207,763) (256,134) Total capital assets, net of accumulated depreciation 685,891 605,915 1,291,806 Total assets 689,422$ 1,118,428$ 1,807,850$ Liabilities Current liabilities Accounts and contracts payable –$ 8,633$ 8,633$ Due to other funds 76,496 – 76,496 Due to other governments 5,044 3,670 8,714 Total liabilities 81,540 12,303 93,843 Net position Net investment in capital assets 685,891 605,915 1,291,806 Unrestricted (78,009) 500,210 422,201 Total net position 607,882 1,106,125 1,714,007 Total liabilities and net position 689,422$ 1,118,428$ 1,807,850$ Business-Type Activities – Enterprise Funds CITY OF GEM LAKE Statement of Net Position Proprietary Funds December 31, 2020 See notes to basic financial statements -14- Water Sewer Total Operating revenue Charges for services 11,542$ 57,893$ 69,435$ Water and sewer availability charges 4,500 4,050 8,550 Total operating revenue 16,042 61,943 77,985 Operating expenses Operating expenses 60,506 44,836 105,342 Depreciation 13,469 16,067 29,536 Total operating expenses 73,975 60,903 134,878 Operating income (loss)(57,933) 1,040 (56,893) Nonoperating income (expense) Investment earnings (charges)(463) 6,294 5,831 Change in net position (58,396) 7,334 (51,062) Net position Beginning of year 666,278 1,098,791 1,765,069 End of year 607,882$ 1,106,125$ 1,714,007$ Business-Type Activities – Enterprise Funds CITY OF GEM LAKE Statement of Revenue, Expenses, and Changes in Net Position Proprietary Funds Year Ended December 31, 2020 See notes to basic financial statements -15- Water Sewer Total Cash flows from operating activities Receipts from customers and users 13,591$ 55,613$ 69,204$ Payments to vendors (67,710) (46,434) (114,144) Net cash flows from operating activities (54,119) 9,179 (44,940) Cash flows from noncapital and related financing activities Cash received from other funds 64,892 168,735 233,627 Cash flows from capital and related financing activities Acquisition of capital assets (10,310) – (10,310) Cash flows from investing activities Interest received (charges)(463) 5,643 5,180 Net change in cash and cash equivalents – 183,557 183,557 Cash and cash equivalents – beginning – 216,986 216,986 Cash and cash equivalents – ending –$ 400,543$ 400,543$ Reconciliation of operating income (loss) to net cash flows from operating activities Operating income (loss)(57,933)$ 1,040$ (56,893)$ Adjustments to reconcile operating income (loss) to net cash flows from operating activities Depreciation 13,469 16,067 29,536 Decrease (increase) in Accounts receivable (2,451) (13,151) (15,602) Due from other governmental units – 6,821 6,821 Prepaid items – (411) (411) Increase (decrease) in Accounts payable – 8,626 8,626 Due to other governments (7,204) (9,813) (17,017) Net cash flows from operating activities (54,119)$ 9,179$ (44,940)$ Business-Type Activities – Enterprise Funds CITY OF GEM LAKE Statement of Cash Flows Proprietary Funds Year Ended December 31, 2020 See notes to basic financial statements -16- CITY OF GEM LAKE Notes to Basic Financial Statements December 31, 2020 -17- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Organization The City of Gem Lake, Minnesota (the City) was incorporated in 1959 and operates under the state of Minnesota Statutory Plan A form of government. The City Council is the governing body and is composed of an elected mayor and four councilmembers who exercise legislative authority and determine all matters of policy. The City Council appoints personnel responsible for the proper administration of all affairs relating to the City. The accounting policies of the City conform to accounting principles generally accepted in the United States of America as applicable to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. B. Reporting Entity As required by accounting principles generally accepted in the United States of America, these financial statements include the City (the primary government) and its component units. Component units are legally separate entities for which the primary government is financially accountable, or for which the exclusion of the component unit would render the financial statements of the primary government misleading. The criteria used to determine if the primary government is financially accountable for a component unit includes whether or not the primary government appoints the voting majority of the potential component unit’s board, is able to impose its will on the potential component unit, is in a relationship of financial benefit or burden with the potential component unit, or is fiscally depended upon by the potential component unit. Based on these criteria, there are no organizations considered to be component units of the City. C. Government-Wide Financial Statements The government-wide financial statements (Statement of Net Position and Statement of Activities) display information about the reporting government as a whole. These statements include all of the financial activities of the City. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on sales, fees, and charges for support. The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include: 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other internally-directed revenues are reported as general revenues. -18- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes and special assessments are recognized as revenues in the fiscal year for which they are certified for levy. Grants and similar items are recognized as revenue when all eligibility requirements imposed by the provider have been met. As a general rule, the effect of interfund activity has been eliminated from the government -wide financial statements. However, charges between the City’s enterprise funds and other functions are not eliminated, as that would distort the direct costs and program revenues reported in those functions. Depreciation expense is included in the direct expenses of each function. Interest on long-term debt is considered an indirect expense and is reported separately on the Statement of Activities. D. Fund Financial Statement Presentation Separate fund financial statements are provided for governmental and proprietary funds. Major individual governmental and enterprise funds are reported as separate columns in the fund financial statements. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this basis of accounting, transactions are recorded in the following manner: 1. Revenue Recognition – Revenue is recognized when it becomes measurable and available. “Measurable” means the amount of the transaction can be determined and “available” means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. For this purpose, the City considers revenues to be available if collected within 60 days after year-end. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. Grants and similar items are recognized when all eligibility requirements imposed by the provider have been met. Proceeds of long-term debt and acquisitions under capital leases, when applicable, are reported as other financing sources. Major revenue that is susceptible to accrual includes property taxes, special assessments, intergovernmental revenue, charges for services, fines and forfeitures, facility rentals, and interest earned on investments. Major revenue that is not susceptible to accrual includes licenses and permits, and miscellaneous revenue. Such revenue is recorded only when received because it is not measurable until collected. 2. Recording of Expenditures – Expenditures are generally recorded when a liability is incurred, except for principal and interest on long-term debt and other long-term obligations, which are recognized as expenditures to the extent they have matured. Capital asset acquisitions are reported as capital outlay expenditures in the governmental funds. Proprietary fund financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, similar to the government-wide financial statements. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the City’s enterprise funds are charges to customers for sales and services. The operating expenses for the enterprise funds include the cost of sales and services, administrative expenses, and depreciation on capital assets . All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. -19- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Description of Funds The City reports the following major governmental funds: General Fund – The General Fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. G.O. Capital Improvement Plan Bonds Series 2007A Debt Service Fund – The G.O. Capital Improvement Plan Bonds Series 2007A Fund accounts for all debt service activity related to the 2007A bond. G.O. Capital Improvement Plan Bonds Series 2018A Debt Service Fund – The G.O. Capital Improvement Plan Bonds Series 2018A Fund accounts for all debt service activity related to the 2018A bond. Hoffman Road Capital Project Fund – The Hoffman Road Fund accounts for all activity related to the reconstruction activities of Hoffman Road. This fund was closed in 2020. Scheuneman Road Capital Project Fund – The Scheuneman Road Fund accounts for activity related to the reconstruction activities of Scheuneman Road. This fund was closed in 2020. Street Improvements Capital Project Fund – The Street Improvements Fund is used to account for the accumulation of resources that are restricted, committed, or assigned to expenditures for capital outlays, including the acquisition or construction of capital facilities. Parks and Playgrounds Capital Project Fund – The Parks and Playgrounds Fund is used to account for the accumulation of resources that are restricted for capital outlays and other costs related to maintaining and improving the City’s parks and playgrounds. The City reports the following major proprietary funds: Water Utility Enterprise Fund – The Water Utility Enterprise Fund accounts for customer water service charges that are used to finance water operating expenses. Sewer Utility Enterprise Fund – The Sewer Utility Enterprise Fund accounts for customer sewer service charges that are used to finance sewer operating expenses. E. Cash and Investments Cash and temporary investments include balances from all funds that are combined and invested to the extent available in various securities as authorized by state law. Earnings from the pooled investments are allocated to the respective funds on the basis of applicable cash balance participation by each fund. For purposes of the Statement of Cash Flows, the City considers all highly liquid instruments with an originally maturity from the time of purchase by the City of three months or less to be cash equivalents. The proprietary funds’ portion in the government-wide cash and investment management pool is considered cash equivalent. -20- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The City reports all investments at fair value. The City categorizes its fair value measurements within the fair value hierarchy established by accounting principles generally accepted in the United States of America. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs. Debt securities classified in Level 2 of the fair value hierarchy are valued using a matrix pricing technique. Matrix pricing is used to value securities based on the securities’ relationship to benchmark quoted prices. See Note 2 for the City’s recurring fair value measurements as of year-end. F. Receivables Utility and miscellaneous accounts receivable are reported at gross. Since the City is generally able to certify delinquent amounts to the county for collection as special assessments, no allowance for uncollectible accounts has been provided on current receivables. All receivables are expected to be collected within one year with the exception of deferred special assessments. G. Property Taxes Property tax levies are set by the City Council by December of each year, and are certified to Ramsey County for collection in the following year. In Minnesota, counties act as collection agents for all property taxes. The county spreads all levies over taxable property. Such taxes become a lien on January 1 and are recorded as receivables by the City on that date. Real property taxes may be paid by taxpayers in two equal installments on May 15 and October 15. Personal property taxes are due in full on May 15. The county provides tax settlements to cities and other taxing districts three times a year; in July, December, and January. Property taxes are recognized as revenue in the year levied in the government-wide financial statements. In the governmental fund financial statements, taxes are recognized as revenue when received in cash or within 60 days after year-end. Taxes which remain unpaid at December 31 are classified as delinquent taxes receivable, and are offset by a deferred inflow of resources in the governmental fund financial statements. H. Special Assessments Special assessments represent the financing for public improvements paid for by benefiting property owners. Special assessments are recorded as receivables upon certification to the county. Special assessments are recognized as revenue in the year levied in the government -wide financial statements. In the governmental fund financial statements, special assessments are recognized as revenue when received in cash or within 60 days after year-end. Governmental fund special assessments receivable, which remain unpaid on December 31, are offset by a deferred inflow of resources in the governmental fund financial statements. I. Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements. Prepaid items are reported using the consumption method and recorded as expenditures/expenses at the time of consumption. -21- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., roads, sidewalks, street lights, and similar items) are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Such assets are capitalized at historical cost or estimated historical cost for assets where actual historical cost is not available. Donated assets are recorded as capital assets at their acquisition value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. The government reports infrastructure assets on a network and subsystem basis. In the case of the initial capitalization of general infrastructure assets (i.e., those reported by governmental activities), the City chose to include all such items regardless of their acquisition date or amount. Capital assets are recorded in the government-wide and proprietary fund financial statements, but are not reported in the governmental fund financial statements. Depreciation on exhaustible assets is recorded as an allocated expense in the statement of activities with accumulated depreciation reflected in the Statement of Net Position. Since surplus assets are sold for an immaterial amount when declared as no longer needed for City purposes, no salvage value is taken into consideration for depreciation purposes. Capital assets are depreciated using the straight-line method over the following estimated useful lives: Estimated Assets Useful Life Buildings 40 years Office equipment 5 to 10 years Infrastructure 20 to 50 years Capital assets not being depreciated include land and construction in progress. K. Long-Term Liabilities In the government-wide and proprietary fund financial statements, long-term debt and other long-term obligations are reported as liabilities. If they are material, bond premiums and discounts are deferred and amortized over the life of the bonds using the straight-line method. Bond issuance costs are expensed in the period incurred. In the governmental fund financial statements, long-term debt and other long-term obligations are not reported as liabilities until due and payable. The face amount of debt issued is reported as other financing sources. Premiums or discounts on debt issuances are reported as other financing sources or uses, respectively. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as expenditures. -22- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. Net Position In the government-wide and proprietary fund financial statements, net position represents the differences between assets, deferred outflows of resources, liabilities, and deferred inflow of resources. Net position is displayed in three components: • Net Investment in Capital Assets – Consists of capital assets, net of accumulated depreciation, reduced by any outstanding debt attributable to acquire capital assets. • Restricted Net Position – Consists of net position restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. • Unrestricted Net Position – All other net position that does not meet the definition of “restricted” or “net investment in capital assets.” The City applies restricted resources first when an expense is incurred for which both restricted and unrestricted resources are available. M. Fund Balance Classifications In the fund financial statements, governmental funds report fund balance in classifications that disclose constraints for which amounts in those funds can be spent. These classifications are as follows: • Nonspendable – Consists of amounts that are not in spendable form, such as prepaid items, inventory, and other long-term assets. • Restricted – Consists of amounts related to externally imposed constraints established by creditors, grantors, or contributors; or constraints imposed by state statutory provisions. • Committed – Consists of internally imposed constraints that are established by resolution of the City Council. Those committed amounts cannot be used for any other purpose unless the City Council removes or changes the specified use by taking the same type of action it employed to previously commit those amounts. • Assigned – Consists of internally imposed constraints. These constraints consist of amounts intended to be used by the City for specific purposes, but do not meet the criteria to be classified as restricted or committed. In governmental funds, assigned amounts represent intended uses established by the governing body itself or by an official to which the governing body delegates the authority. • Unassigned – The residual classification for the General Fund, which also reflects negative residual amounts in other funds. When both restricted and unrestricted resources are available for use, it is the City’s policy to first use restricted resources, then use unrestricted resources as they are needed. When committed, assigned, or unassigned resources are available for use, it is the City’s policy to use resources in the following order: 1) committed, 2) assigned, and 3) unassigned. -23- NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) N. Budgets and Budgetary Accounting Budget amounts are presented on the modified accrual basis of accounting. Each fall, the City Council adopts a General Fund budget for the following fiscal year beginning January 1. The City has established budgetary control at the fund level. Budget appropriations lapse at year-end. O. 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. The City continues to carry commercial insurance for all risks of loss, including disability and employee health insurance. Settled claims resulting from these risks have not exceeded insurance coverage in any of the past three fisc al years. There were no significant reductions in insurance coverage in the current year. P. Use of Estimates The preparation of financial statements, in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect amounts reported in the financial statements during the reporting period . Actual results could differ from such estimates. Q. Interfund Receivables and Payables In the fund financial statements, activity between funds that is representative of lending or borrowing arrangements is reported as either “due to/from other funds” (current portion) or “advances to/from other funds.” All other outstanding balances between funds are reported as “due to/from other funds.” Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as “internal balances.” -24- NOTE 2 – DEPOSITS AND INVESTMENTS A. Components of Cash and Investments Cash and investments at year-end consist of the following: Deposits 1,067,784$ Investments 335,356 Total 1,403,140$ B. Deposits In accordance with Minnesota Statutes, the City maintains deposits at financial institutions which are authorized by the City Council, including checking accounts and certificates of deposit. The following is considered the most significant risk associated with deposits: Custodial Credit Risk – In the case of deposits, this is the risk that in the event of a bank failure, the City’s deposits may be lost. Minnesota Statutes require that all deposits be protected by federal deposit insurance, corporate surety bond, or collateral. The market value of collateral pledged must equal 110 percent of the deposits not covered by federal deposit insurance or corporate surety bonds. Authorized collateral includes treasury bills, notes, and bonds; issues of U.S. government agencies; general obligations rated “A” or better; revenue obligations rated “AA” or better; irrevocable standard letters of credit issued by the Federal Home Loan Bank; and certificates of deposit. Minnesota Statutes require that securities pledged as collateral be held in safekeeping in a restricted account at the 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. The City’s investment policy states that no more than 5 percent of the overall portfolio may be invested in the securities of a single issuer, except for the securities of the U.S. Government or an external investment pool. At year-end, the carrying amount of the City’s deposits was $1,067,784, while the balance on the bank records was $1,081,256. At December 31, 2020, all deposits were fully covered by federal deposit insurance, surety bonds, or by collateral held by the City’s agent in the City’s name. C. Investments The City has the following investments at year-end: Fair Value Measurements Investment Type Rating Agency Using Less Than 1 1 to 5 6 to 10 Total Municipal bonds AA Moody’s Level 2 –$ –$ 167,112$ 167,112$ Negotiable certificates of deposit N/R N/A Level 2 –$ 168,244$ –$ 168,244 Total investments 335,356$ N/R – Not Rated Interest Risk – Maturity Duration in YearsCredit Risk N/A – Not Applicable -25- NOTE 2 – DEPOSITS AND INVESTMENTS (CONTINUED) Investments are subject to various risks, the following of which are considered the most significant: Custodial Credit Risk – For investments, this is the risk that in the event of a failure of the counterparty to an investment transaction (typically a broker-dealer), the City would not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The City’s investment policy does not further address this risk. Credit Risk – This is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Minnesota Statutes limit the City’s investments to direct obligations or obligations guaranteed by the United States or its agencies; shares of investment companies registered under the Federal Investment Company Act of 1940 that receive 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 $10,000,000; that are a primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York ; or certain Minnesota securities broker-dealers. The City’s investment policy does not further address credit risk. Concentration Risk – This is the risk associated with investing a significant portion of the City’s investments (considered 5.0 percent or more) in the securities of a single issuer, excluding U.S. guaranteed investments (such as treasuries), investment pools, and mutual funds. The City’s investment policy states that no more than 5.0 percent of the overall portfolio may be invested in the securities of a single issuer, except for the securities of the United States government, or an external investment pool. The following is a list of investments, which individually comprise more than 5.0 percent of the City’s total investments: Goldman Sachs Bank – certificates of deposit 41,428$ 12.4% Comenity Capital Bank – certificates of deposit 126,816$ 37.8% New York City – municipal bonds 167,112$ 49.8% Interest Rate Risk – This is the risk of potential variability in the fair value of fixed rate investments resulting from changes in interest rates (the longer the period for which an interest rate is fixed, the greater the risk). The City’s investment policy does not further address interest rate risk. -26- NOTE 3 – CAPITAL ASSETS Capital asset activity for the year ended December 31, 2020 was as follows: A. Changes in Capital Assets Used in Governmental Activities Balance –Transfers and Beginning Completed Balance – of Year Additions Deletions Construction End of Year Capital assets, not depreciated Land 2,500$ –$ –$ –$ 2,500$ Construction in progress – 8,853 – – 8,853 Total capital assets, not depreciated 2,500 8,853 – – 11,353 Capital assets, depreciated Buildings 902,232 – – – 902,232 Office equipment 17,900 – – – 17,900 Infrastructure 1,563,728 – – – 1,563,728 Total capital assets, depreciated 2,483,860 – – – 2,483,860 Less accumulated depreciation for Buildings (267,068) (22,497) – – (289,565) Office equipment (12,905) (1,099) – – (14,004) Infrastructure (603,305) (67,327) – – (670,632) Total accumulated depreciation (883,278) (90,923) – – (974,201) Net capital assets, depreciated 1,600,582 (90,923) – – 1,509,659 Net capital assets 1,603,082$ (82,070)$ –$ –$ 1,521,012$ B. Changes in Capital Assets Used in Business-Type Activities Balance –Transfers and Beginning Completed Balance – of Year Additions Deletions Construction End of Year Capital assets, depreciated Infrastructure 1,537,630$ 10,310$ –$ –$ 1,547,940$ Less accumulated depreciation for Infrastructure (226,598) (29,536) – – (256,134) Net capital assets 1,311,032$ (19,226)$ –$ –$ 1,291,806$ C. Depreciation Expense by Function Depreciation expense was charged to the following functions: Governmental activities General government 23,596$ Public works 66,627 Conservation and development 750 Total depreciation expense – governmental activities 90,973$ Business-type activities Water 13,469$ Sewer 16,067 Total depreciation expense – business-type activities 29,536$ -27- NOTE 4 – LONG-TERM LIABILITIES A. Components of Long-Term Debt Final Balance – Original Issue Interest Rate Issue Date Maturity Date End of Year Governmental activities General obligation (G.O.) bonds G.O. Refunding Bonds of 2015A 775,000$ 1.25–2.90%06/17/2015 02/01/2028 530,000$ G.O. Improvement Bonds of 2018A 660,000$ 3.00–4.00%07/12/2018 02/01/2034 630,000 1,160,000 Unamortized premiums 16,081 Total governmental activities long-term debt 1,176,081$ B. Changes in Long-Term Debt Balance –Balance – Beginning End Due Within of Year Additions Retirements of Year One Year Governmental activities G.O. bonds G.O. Refunding Bonds of 2015A 590,000$ –$ 60,000$ 530,000$ 60,000$ G.O. Improvement Bonds of 2018A 660,000 – 30,000 630,000 35,000 Unamortized premiums 17,363 – 1,282 16,081 – Total 1,267,363$ –$ 91,282$ 1,176,081$ 95,000$ C. Minimum Debt Payments Minimum annual principal and interest payments required to retire bonds payable are as follows: Year Ending December 31,Principal Interest 2021 95,000$ 34,065$ 2022 105,000 31,659 2023 105,000 29,029 2024 105,000 26,301 2025 105,000 23,476 2026–2030 435,000 72,348 2031–2034 210,000 17,200 Total 1,160,000$ 234,078$ Governmental Activities D. Description and Restrictions of Long-Term Debt General Obligation Bonds – The bonds were issued for improvements or projects, or to refund previously issued bonds, which benefited the City as a whole and are, therefore, repaid from ad valorem levies. E. Ultimate Responsibility for Debt All general obligation bonds are backed by the full faith and credit of the City. -28- NOTE 5 – INTERFUND BALANCES AND ACTIVITIES A. Due To/From Other Funds Individual fund receivable and payable balances at December 31, 2020 are as follows: Receivable Fund Payable Fund Amount Sewer Enterprise Water Enterprise 76,496$ Interfund receivable and payable balances represent the elimination of negative cash between funds. B. Interfund Transfers Individual fund transfers at December 31, 2020 are as follows: Hoffman Scheuneman Street Transfers Out Road Road Improvements Total Governmental funds General 232,018$ 2,210$ 175,772$ 410,000$ Transfers In During 2020, the City made routine interfund transfers for various reasons, including to fund negative fund balances, as well as provide additional funds for completing upcoming capital projects. NOTE 6 – COMMITMENTS AND CONTINGENCIES A. Legal Claims The City has the usual and customary type of miscellaneous legal claims pending at year-end. Although the outcome of these lawsuits is not presently determinable, the City’s management believes that the City will not incur any material monetary loss resulting from these claims. No loss has been recorded on the City’s financial statements relating to these claims. B. COVID-19 The COVID-19 pandemic has caused economic and financial market volatility in the United States and around the world, along with significant business and operational disruptions for many organizations. Due to the unknown breadth and duration of this pandemic, any potential impact it may have on the City’s future operations and financial condition cannot be determined at this time and has not been reflected in these financial statements. OTHER REQUIRED REPORTS THIS PAGE INTENTIONALLY LEFT BLANK -29- INDEPENDENT AUDITOR’S 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 To the City Council and Management City of Gem Lake, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, t he financial statements of the governmental activities, the business-type activities, and each major fund of the City of Gem Lake, Minnesota (the City) as of and for the year ended December 31, 2020, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon June 22, 2021. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the City’s internal control over financial reporting (internal control) as a basis for designing 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. 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 City’s financial statements will not be prevented, or detected and corrected, on a timely basis. 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. Our consideration of internal control was for the limited purpose described in the first paragraph of this section 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 have not been identified. We did identify one deficiency in internal control, described in the accompanying Schedule of Findings and Responses as finding 2020-001, that we consider to be a material weakness. (continued) C E R T I F I E D A C C O U N T A N T S P UBLIC PRINCIPALS Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA/CMA Jaclyn M. Huegel, CPA Kalen T. Karnowski, CPA Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 -30- 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, re gulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the financial statements. 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 FINDING The City’s response to the finding 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 report is not suitable for any other purpose. Minneapolis, Minnesota June 22, 2021 -31- INDEPENDENT AUDITOR’S REPORT ON MINNESOTA LEGAL COMPLIANCE To the City Council and Management City of Gem Lake, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, and each major fund of the City of Gem Lake, Minnesota (the City) as of and for the year ended December 31, 2020, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 22, 2021. MINNESOTA LEGAL COMPLIANCE In connection with our audit, we noted that the City failed to comply with provisions of the claims and disbursements and miscellaneous provisions sections of the Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minnesota Statutes § 6.65, insofar as they relate to accounting matters as described in the Schedule of Findings and Responses as findings 2020-002, 2020-003, and 2020-004. Also, 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 contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, and tax increment financing sections of the Minnesota Legal Compliance Audit Guide for Cities, insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City’s noncompliance with the above-referenced provisions, insofar as they relate to accounting matters. CITY’S RESPONSES TO FINDINGS The City’s responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses. The City’s responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota June 22, 2021 C E R T I F I E D A C C O U N T A N T S P UBLIC PRINCIPALS Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA/CMA Jaclyn M. Huegel, CPA Kalen T. Karnowski, CPA Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Phone: 952-545-0424 • Fax: 952-545-0569 • www.mmkr.com Standard Letterhead-r2.qxp_167639 Letterhead-RV1 9/7/18 6:34 PM Page 1 THIS PAGE INTENTIONALLY LEFT BLANK CITY OF GEM LAKE Schedule of Findings and Responses Year Ended December 31, 2020 -32- A. FINDINGS – MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING 2020-001 INADEQUATE SEGREGATION OF DUTIES Criteria – Internal control over financial reporting. Condition – The City of Gem Lake, Minnesota (the City) has limited segregation of duties in a number of areas, including, but not limited to, controls over cash receipts, cash disbursements, utility billing, and payroll. Context – This is a current year and prior year finding. Cause – The limited segregation of duties is primarily caused by the limited size of the City’s office staff. Effect – One important element of internal accounting controls is an adequate segregation of duties such that no one individual have responsibility to execute a transaction, have physical access to the related assets, and have responsibility or authority to record the transaction. A lack of segregation of duties subjects the City to a higher risk that errors or fraud could occur and not be detected in a timely manner in the normal course of business. Recommendation – We recommend that the City continue its efforts to segregate duties as best it can within the limits of what the City considers to be cost-beneficial. Management Response – There is no disagreement with the audit finding. The City reviews and makes improvements to its internal control structure on an ongoing basis to maximize the segregation of duties in all areas within the limits of the staff available. However, the City does not consider it cost-beneficial at this time to increase the size of its finance department staff in order to further segregate accounting functions. CITY OF GEM LAKE Schedule of Findings and Responses (continued) Year Ended December 31, 2020 -33- B. FINDINGS – MINNESOTA LEGAL COMPLIANCE AUDIT 2020-002 ELECTRONIC FUNDS TRANSFERS DELEGATION Criteria – Minnesota Statutes §471.38, Subd. 3 and 3a, requires the City to enact a plan containing policy controls for delegating authority to make electronic funds transfers and retaining documentation of the electronic transactions. Condition – The City has not enacted a plan for delegating authority and implementing controls over electronic funds transfers. Context – This is a current year and prior year finding. Cause – This was an oversight by city personnel. Effect – The City is not in compliance with state electronic funds transfers requirements. Recommendation – We recommend the City develop procedures and controls over electronic funds transfers and also add the annual delegation of authority to its list of items that are formally approved each year to be in compliance with state statutes. Management Response – There is no disagreement with the audit finding. The City will review its procedures relating to electronic funds transfers to ensure compliance in the future. 2020-003 PAYROLL DECLARATION Criteria – Minnesota Statutes § 412.271, Subd. 2, requires the City’s timekeeper, supervisor, or other officers or employees having knowledge of the facts , to sign a declaration indicating the facts recited on the payroll are correct to the best of the declarant’s information and belief. Condition – The City’s employee did not sign such a declaration in the current year. Context – This is a current year finding. Cause – This was an oversight by city personnel. Effect – The City is not in compliance with state claims and disbursements requirements. Recommendation – We recommend the City maintain payroll records with a signed declaration that the facts recited on the payroll are correct to the best of the declarant’s information and belief to be in compliance with state statutes. Management Response – The City agrees with the finding. The City will review its procedures relating to payroll declaration laws to ensure compliance in the future. CITY OF GEM LAKE Schedule of Findings and Reponses (continued) Year Ended December 31, 2020 -34- B. FINDINGS – MINNESOTA LEGAL COMPLIANCE AUDIT (CONTINUED) 2020-004 UNCLAIMED PROPERTY REPORT Criteria – Minnesota Statutes § 345.38-345.43 requires unclaimed property held for more than three years (or one year for unpaid compensation) to be reported and paid or delivered to the state Commissioner of Commerce each year. Condition – The City did not file the unclaimed property report to the state Commissioner of Commerce in the current year. Context – This is a current year finding. Cause – This was an oversight by city personnel. Effect – The City was not in compliance with state unclaimed property requirements. Recommendation – We recommend the City report unclaimed property to the state Commissioner of Commerce annually to be in compliance with state statutes. Management Response – The City agrees with the finding. The City will review its procedures relating to unclaimed property laws to ensure compliance in the future. THIS PAGE INTENTIONALLY LEFT BLANK