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HomeMy WebLinkAbout2025 Financial StatementsCITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA Financial Statements and Other Information Year Ended December 31, 2025 THIS PAGE INTENTIONALLY LEFT BLANK CITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA Table of Contents Page INTRODUCTORY SECTION CITY COUNCIL AND OTHER OFFICIALS FINANCIAL SECTION INDEPENDENT AUDITOR'S REPORT 2-4 BASIC FINANCIAL STATEMENTS Government -Wide Financial Statements Statement of Net Position 5 Statement of Activities 6-7 Fund Financial Statements Governmental Funds Balance Sheet 8-9 Reconciliation of the Balance Sheet to the Statement of Net Position 10 Statement of Revenue, Expenditures, and Changes in Fund Balances 11-12 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities 13 Statement of Revenue, Expenditures, and Changes in Fund Balances — Budget and Actual — General Fund 14 Proprietary Funds Statement of Net Position 15 Statement of Revenue, Expenses, and Changes in Net Position 16 Statement of Cash Flows 17 Notes to Basic Financial Statements 18-31 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 32-33 Independent Auditor's Report on Minnesota Legal Compliance 34-35 Schedule of Findings and Responses 36-38 THIS PAGE INTENTIONALLY LEFT BLANK INTRODUCTORY SECTION THIS PAGE INTENTIONALLY LEFT BLANK Gretchen Artig-Swomley Leonard Cacioppo Ben Johnson James Lindner Joshua Patrick Barbara Suciu Tom Kelly Don Cummings Ij CITY OF GEM LAKE RAMSEY COUNTY, MINNESOTA City Council and Other Officials as of December 31, 2025 CITY COUNCIL OTHER OFFICIALS Mayor Councilmember Councilmember Councilmember Councilmember City Clerk City Treasurer Planning Commission Chair Ij THIS PAGE INTENTIONALLY LEFT BLANK FINANCIAL SECTION THIS PAGE INTENTIONALLY LEFT BLANK J J J LB I CARLSON INDEPENDENT AUDITOR'S REPORT To the City Council and Management City of Gem Lake, Minnesota REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS OPINIONS We have audited the accompanying financial statements of the governmental activities, the business -type activities, and each major Sind of the City of Gem Lake, Minnesota (the City) as of and for the year ended December 31. 2025, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, and each major fund of the City as of December 31, 2025, 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 States of America. BASIS FOR OPINIONS 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. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the City and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. RESPONSIBILITIES OF MANAGEMENT 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: and for 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the City's ability to continue as a going concern for 12 months beyond the financial statements date, including any currently known information that may raise substantial doubt shortly thereafter. -2- (continued) AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinions. Reasonable assurance is a high level of assurance, but is not absolute assurance and, therefore, is not a guarantee that an audit conducted in accordance with generally accepted auditing standards and Government Auditing Standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgement made by a reasonable user based on the financial statements. In performing an audit in accordance with generally accepted auditing standards and Government Auditing Standards, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. • Obtain an understanding of internal control relevant to the audit 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, no such opinion is expressed. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the City's ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit. 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 financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. (continued) -3- OTHER INFORMATION Management is responsible for the other information included in the annual report. The other information comprises the introductory section, but does not include the basic financial statements and our auditor's report thereon. Our opinions on the basic financial statements do not cover the other information, and we 1 do not express an opinion or any form of assurance thereon. In connection with our audit of the basic financial statements, our responsibility is to read the other 1 information and consider whether a material inconsistency exists between the other information and the basic financial statements, or the other information otherwise appears to be materially misstated. If, based on the work performed, we conclude that an uncorrected material misstatement of the other information r� exists, we are required to describe it in our report. OTHER REPORTING REQUIRED BY GOVERNMENTAUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated June 23, 2026, 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. J 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. Respectfully submitted, z—x LB CARLSON, LLP Minneapolis, Minnesota -I June 23, 2026 is I I j THIS PAGE INTENTIONALLY LEFT BLANK BASIC FINANCIAL STATEMENTS THIS PAGE INTENTIONALLY LEFT BLANK CITY OF GEM LAKE Statement of Net Position December 31, 2025 Assets Cash and investments Receivables Accounts Accrued interest Property taxes Special assessments Due from other governments Prepaid items Capital assets Not being depreciated Depreciated, net of accumulated depreciation Total assets Liabilities Accounts and contracts payable Accrued interest payable Due to other governments Accrued salaries payable Deposits payable Unearned revenue Long-term liabilities Amounts due in one year Amounts due in more than one year Total liabilities Net position Net investment in capital assets Restricted for debt service Restricted for park improvements Unrestricted Total net position Total liabilities and net position See notes to basic financial statements -5- Governmental Business -Type Activities Activities Total $ 1,566,930 $ 450,220 $ 2,017,150 11,999 33,368 45,367 29,263 14,733 43,996 16,766 - 16,766 447,265 7,161 454,426 7,737 - 7,737 123,362 - 123,362 2,500 55,794 58,294 1,441.927 1,130,092 2,572,019 $ 3,647,749 $ 1,691,368 $ 5,339,117 $ 11,241 $ 7,522 $ 18,763 9,173 - 9,173 15,462 6,853 22,315 3,940 - 3,940 16,200 - 16,200 17,422 - 17,422 110,000 - 110,000 544,671 - 544,671 728,109 14,375 742,484 789,756 1,185,886 1,975,642 592,103 - 592,103 56,862 - 56,862 1,480,919 491,107 1,972,026 2,919,640 1,676,993 4,596,633 $ 3,647.749 $ 1,691,368 $ 5,339,117 CITY OF GEM LAKE Statement of Activities Year Ended December 31, 2025 Program Revenues Operating Capital Charges for Grants and Grants and Functions/Programs Expenses Services Contributions Contributions Governmental activities General government $ 286,256 $ 89,607 $ 13,111 $ 118 Public safety 207,700 - 7,753 _ Public works 79,166 100,531 12,991 Conservation and development 153,460 _ _ Interest and fiscal charges 25,476 - Total governmental activities 752,058 190,138 20,864 13,109 Business -type activities Water 37,391 49,788 - _ Sewer 99,559 78,194 _ _ Total business -type activities 136,950 127,982 - Total $ 889,008 $ 318,120 $ 20,864 $ 13,109 General revenues Property taxes General purposes Debt service Franchise fees Investment earnings Other Total general revenues Change in net position Net position - beginning of year Net position - end of year See notes to basic financial statements -6- Net (ExImis 1 Revenue and Changes in Net Position Governmental Business -Type Activities Activities Total $ (183,420) $ — $ (183,420) (199,947) — (199,947) 34,356 — 34,356 (153,460) — (153,460) (25,476) — (25,476) (527,947) — (527,947) — 12,397 12,397 — (21,365) (21,365) — (8,968) (8,968) (527,947) (8,968) (536,915) 629,387 — 629,387 83,200 — 83,200 7,441 — 7,441 72,372 33,088 105,460 49,243 — 49,243 841,643 33,088 874,731 313,696 24,120 337,816 2,605,944 1.6521,873 4,258,817 $ 2,919,640 $ 1,676,993 $ 4,596,633 -7- CITY OF GEM LAKE Balance Sheet Governmental Funds December 31, 2025 G.O. Capital G.O. Capital Improvement Improvement Plan Bonds Plan Bonds Street General Series 2015A Series 2018A Improvements Assets Cash and investments $ 919,911 $ 77,714 $ 70,575 $ 443,500 Receivables Accounts 11,999 - - - Accrued interest 20,859 2,707 2,262 1,803 Property taxes Current 5,206 653 33 - Delinquent 9,397 1,370 107 - Special assessments Delinquent 90 - - - Deferred 1,530 - 325,424 120,221 Due from other governments 7,737 - _ _ Prepaid items 1,304 73,433 48,625 - Total assets $ 978,033 $ 155,877 $ 447,026 $ 565,524 Liabilities Accounts and contracts payable $ 11,241 $ - $ - $ - Due to other governments 15,462 - - - Accrued salaries payable 3,940 - - _ Deposits payable 16,200 - - _ Unearned revenue 15,795 - 1,627 _ Total liabilities 62,638 - 1,627 - Deferred inflows of resources Unavailable revenue 11,017 1,370 325,531 120,221 Fund balances Nonspendable 1,304 73,433 48,625 - Restricted for debt service 81,074 71,243 - Restricted for park improvements - _ - Assigned for capital improvements - - - 445,303 Unassigned 903,074 - - _ Total fund balances 904,378 154,507 119,868 445,303 Total liabilities, deferred inflows of resources, and fund balances $ 978,033 $ 155,877 $ 447,026 $ 565,524 See notes to basic financial statements -8- Parks and Total Playgrounds Governmental $ 55,230 $ 1,566,930 11,999 1,632 29,263 — 5,892 — 10,874 — 90 — 447,175 — 7,737 — 123,362 $ 56,862 $ 2,203,322 $ — $ 11,241 15,462 3,940 16,200 17,422 64,265 458,139 123,362 — 152,317 56,862 56,862 — 445,303 — 903,074 56,862 1,680,918 $ 56,862 $ 2,203,322 -9- THIS PAGE INTENTIONALLY LEFT BLANK CITY OF GEM LAKE Reconciliation of the Balance Sheet to the Statement of Net Position Governmental Activities December 31, 2025 Total fund balances — governmental funds $ 1,680,918 Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. Cost of capital assets 942587 2,, Less accumulated depreciation (1,49898,16060) 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. 458,139 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 (6 ,671) Unamortized bond premiums (9 ,71) 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. (9,173) Total net position — governmental activities $ 2,919,640 See notes to basic financial statements -10- CITY OF GEM LAKE Statement of Revenue, Expenditures, and Changes in Fund Balances Governmental Funds Year Ended December 31, 2025 G.O. Capital G.O. Capital Improvement Improvement Plan Bonds Plan Bonds Street General Series 2015A Series 2018A Impro\emunts Revenue Taxes Property taxes $ 629,387 $ 79,202 $ 3,998 $ - Franchise fees 7,441 - _ _ Special assessments 118 - 53,695 38,878 Intergovernmental 20,864 - _ _ Licenses and permits 109,010 - _ _ Fines and forfeitures 726 - _ _ Charges for services 50,058 - - _ Investment earnings 43,951 6,046 5,013 13,675 Facility rental 13,883 - _ _ Miscellaneous 16,461 653 33 48,557 Total revenue 891,899 85,901 62,739 101,110 Expenditures Current General government 252,079 - _ _ Public safety 207,700 - _ _ Public works 1,812 - _ - Conservation and development 152,710 - _ _ Capital outlay 13,975 - _ _ Debt service Principal - 65,000 40,000 - Interest and fiscal charges - 10,276 17,700 - Total expenditures 628,276 75,276 57,700 - Excess of revenue over expenditures 263,623 10,625 5,039 101,110 Other financing sources (uses) Transfers in - - - 20,000 Transfers (out) (20,000) - _ _ Total other financing sources (uses) (20,000) - - 20,000 Net change in fund balances 243,623 10,625 5,039 121,110 Fund balances Beginning of year 660,755 143.882 114,829 324,193 End of year $ 904,378 $ 154,507 $ 119,868 $ 445,303 See notes to basic financial statements -11- Parks and Total Playgrounds Governmental $ — $ 712,587 7,441 92,691 20,864 109,010 726 50,058 3,687 72,372 — 13,883 65,704 3,687 1,145,336 252,079 207,700 1,812 152,710 13,975 105,000 27.976 — 761,252 3,687 384,084 — 20,000 (20,000) 3,687 384,084 53,175 1.296.8 -1 $ 56,862 $ 1.080.918 -12- THIS PAGE INTENTIONALLY LEFT BLANK 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, 2025 Total net change in fund balances — governmental funds $ 384,084 Amounts reported for governmental activities in the Statement of Activities are different because: 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 13,975 Depreciation expense (112,281) 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. (79,582) Repayment of bond principal is an expenditure in the governmental funds, but reduces long- term liabilities in the Statement of Net Position. 105,000 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 1,218 Change in net position — governmental activities $ 313,696 See notes to basic financial statements -13- CITY OF GEM LAKE General Fund Statement of Revenue, Expenditures, and Changes in Fund Balances - Budget and Actual Year Ended December 31, 2025 Revenue Taxes Property taxes Franchise fees Special assessments Intergovernmental Licenses and permits Fines and forfeitures Charges for services Investment earnings Facility rental Miscellaneous Total revenue Expenditures Current General government Public safety Public works Conservation and development Capital outlay Total expenditures Excess of revenues over expenditures Other financing (uses) Transfers (out) Net change in fund balances Fund balances Beginning of year End of year See notes to basic financial statements -14- Original and Over (Under) Final Budget Actual Final Budget $ 635,000 $ 629,387 $ (5,613) 7,000 7,441 441 - 118 118 1,012 20,864 19,852 29,275 109,010 79,735 850 726 (124) 3,150 50,058 46,908 8,000 43,951 35,951 4,500 13,883 9,383 2,100 16,461 14,361 690,887 891,899 201,012 285,309 252,079 (33,230) 212,228 207,700 (4,528) 72,700 1,812 (70,888) 84,650 152,710 68,060 16,000 13,975 (2,025) 670,887 628,276 (42,611) 20,000 263,623 243,623 (20,000) (20,000) - $ - 243,623 $ 243,623 $ 904,378 CITY OF GEM LAKE Statement of Net Position Proprietary Funds December 31, 2025 Business -Type Activities - Enterprise Funds Water Sewer Total Assets Current assets $ - $ 450,220 $ 450,220 Cash and investments Receivables 9,624 23,744 33,368 Accounts Accrued interest (charges) (2,053) 16,786 14,733 Special assessments - 7,161 7,161 Deferred Due from other funds - 110,609 110,609 Total current assets 7,571 608,520 616,091 Noncurrent assets Capital assets 55,794 - 55,794 Construction in progress 734,262 813,678 1,547,940 Infrastructure Less accumulated depreciation (127,876) (289,972) (417,848) Total capital assets, net of accumulated depreciation 662,180 523,706 1,185,886 Total assets $ 669,751 $ 1,132,226 $ 1,801,977 Liabilities Current liabilities 522 Accounts and contracts payable $ 4,10$ 3,420 $ , Due to other funds 110,6099 - 1100,660909 Due to other governments 5,615 1.238 6,853 Total liabilities 120,326 4,658 124,984 Net position Net investment in capital assets 662,180 523,706 1,185,886 Unrestricted (112.755) 603,862 491,107 Total net position 549A25 1,127,568 1,676,993 Total liabilities and net position $ 669,751 $ 1,132,226 $ 1,801,977 See notes to basic financial statements -15- CITY OF GEM LAKE Statement of Revenue, Expenses, and Changes in Net Position Proprietary Funds Year Ended December 31, 2025 Operating revenue Charges for services Special assessments Total operating revenues Operating expenses Operating expenses Depreciation Total operating expenses Operating income (loss) Nonoperating income (expense) Investment earnings (charges) Change in net position Net position Beginning of year End of year See notes to basic financial statements -16- Business -Type Activities — Enterprise Funds Water Sewer Total $ 49,788 $ 71,033 $ 120,821 — 7,161 7,161 49,788 78,194 127,982 21,881 83,180 105,061 15,510 16,379 31,889 37,391 99,559 136,950 12,397 (21,365) (8,968) (4,845) 37,933 33,088 7,552 16,568 24,120 541,873 1,111,000 1,652,873 $ 549,425 $ 1,127,568 $ 1,676,993 CITY OF GEM LAKE Statement of Cash Flows Proprietary Funds Year Ended December 31, 2025 Cash flows from operating activities Receipts from customers and users Payments to vendors Net cash flows from operating activities Cash flows from capital and related financing activities Acquisition and construction of capital assets Cash flows from noncapital and related financing activities Cash received from (paid to) other funds Cash flows from investing activities Interest received (charged) Net change in cash and cash equivalents Cash and cash equivalents —beginning Cash and cash equivalents — ending Reconciliation of operating income (loss) to net cash flows from operating activities Operating income (loss) Adjustments to reconcile operating income (loss) to net cash flows from operating activities Depreciation Decrease (increase) in Accounts receivable Special assessments receivable Increase (decrease)in Accounts payable Due to other governments Net cash flows from operating activities See notes to basic financial statements -17- Business -Type Activities —Enterprise Funds Water Sewer Total $ 46,001 $ 69,255 $ 115,256 (17,255) (79,567) (96,822) 28,746 (10,312) 18,434 (55,794) — (55,794) 28,332 (28,332) — (3,057) 22,966 19,909 (1,773) (15,678) (17,451) 1,773 465,898 467,671 $ — $ 450.220 $ 450,220 $ 12,397 $ (21,365) $ (8,968) 15,510 16,379 31,889 (3,787) (1,778) (5,565) — (7,161) (7,161) 4,102 3,417 7,519 524 196 720 $ 28,746 $ (10,312) $ 18,434 THIS PAGE INTENTIONALLY LEFT BLANK CITY OF GEM LAKE Notes to Basic Financial Statements December 31, 2025 NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1 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 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 1 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. N 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 I or segment. Taxes and other internally -directed revenues are reported as general revenues. J -18- J 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. Debt proceeds 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- -1 —� NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Description of Funds 1 The City reports the following major governmental funds: JGeneral 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 2015A Debt Service Fund — The G.O. Capital Improvement Plan Bonds Series 2015A Fund accounts for all debt service activity related to the 2015A 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. Street Improvements Capital Project Fund — The Street Improvements Capital Project 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 Capital Project 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 Enterprise Fund — The Water Enterprise Fund accounts for customer water service charges that are used to finance water operating expenses. Sewer Enterprise Fund — The Sewer 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 original 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 a cash equivalent. 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. iJ -20- iJ NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Investment pools/mutual funds reporting fair value measurements using NAV — Net Asset Value have no unfunded commitments, the redemption frequency is daily, and no redemption notice is required. 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 delinquent and deferred special assessments and delinquent property taxes receivable. 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. The City defines capital assets as those with an initial, individual cost of $500 or more with an estimated useful life in excess of five years. Groups of similar assets acquired at or near the same time for a single objective, with individual acquisition costs below this threshold, are also capitalized if costs of the assets is considered significant in the aggregate. 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 and proprietary funds Statement of Revenue, Expenses, and Changes in Net Position with accumulated depreciation reflected in the government -wide and proprietary funds 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: Assets Buildings Office equipment Infrastructure Estimated Useful Life 40 years 5 to 10 years 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. h 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 J 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. J -22- J NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. Compensated Absences Payable The City recognizes a liability for compensated absences for leave time that (1) has been earned for services previously rendered by employees, (2) accumulates and is allowed to be carried over to subsequent years, and (3) is more likely than not to be used as time off or settled during or upon separation from employment. Based on this criteria, one type of leave qualifies for liability recognition for compensated absences — flex leave. The liability for compensated absences is reported as incurred in the government -wide financial statements, if significant. A liability for compensated absences is recorded in the governmental funds only if the liability has matured because of employee resignations or retirements. The liability for compensated absences includes salary -related benefits, where applicable. M. 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. N. 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. -23- NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) • 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. O. 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. P. 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 jinsurance 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 fiscal years. There were no significant reductions in insurance coverage in the current year. J Q. 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 1 such estimates. R. Interfund Balances and Transfers 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 Jresidual balances outstanding between the governmental activities and business -type activities are reported in the government -wide financial statements as "internal balances." It is the City's policy to eliminate all interfund transactions, except for activity between the governmental activities and business -type activities, for presentation in the government -wide Statement of Net Position and Statement of Activities. J J -24- J NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) S. Deferred Outflows/Inflows of Resources In addition to assets and liabilities, statements of financial position, or balance sheets, will sometimes report deferred outflows or inflows of resources. These separate financial statement elements represent a consumption or acquisition of net assets that applies to a future period and so will not be recognized as an outflow of resources (expense/expenditure) or an inflow of financial resources (revenue) until then. Unavailable revenue arises only under a modified accrual basis of accounting and, therefore, is only reported in the governmental funds financial statements. The governmental funds report unavailable revenue from two sources: property taxes and special assessments. These amounts are deferred and recognized as inflows of resources in the period they become available. NOTE 2 — DEPOSITS AND INVESTMENTS A. Components of Deposits and Investments Cash and investments at year-end consist of the following: Deposits $ 370,565 Investments 1,646,585 Total $ 2,017,150 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 has no additional deposit policies addressing custodial credit risk. At year-end, the carrying amount of the City's deposits was $370,565, while the balance on the bank records was $377,435. At December 31, 2025, 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. -25- NOTE 2 —DEPOSITS AND INVESTMENTS (CONTINUED) C. Investments The City has the following investments at year-end: Interest Risk —Maturity Duration in Years Fair Value No Credit Risk Measurements Maturity Less Investment Type Rating Agency Using Date Than 1 1 to 5 Total Municipal bonds AA Moody's Level $ — $ — $ 144,163 $ 144,163 Municipal bonds AA S&P Level 2 — 523,104 — 523,104 Negotiable certificates of deposit N/R N/A Level 2 — — 399,210 399,210 U.S agency securities N/R N/A Level 2 — — 549,533 549,533 Investment pools/mutual funds Aaa Moody's NAV 30,575 — — 30,575 Total investments $ 30,575 $ 523.104 S 1.092.906 S 1.646,585 N/R — Not Rated N/A — Not Applicable NAV — Net Asset Value, No Unfunded Commitments, No Redemption Restrictions 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. ►112 NOTE 2 — DEPOSITS AND INVESTMENTS (CONTINUED) 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: Federal Home Loan Mortgage Corporation 27.5% Federal National Mortgage Association 5.8% Hartford County, CT 9.4% JP Morgan Chase Bank 9.1 % Madison Borough, NJ 13.6% Morgan Stanley Bank 15.2% New York State Dormitory Authority 8.8% New York City Transit 8.8% 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. NOTE 3 — CAPITAL ASSETS Capital asset activity for the year ended December 31, 2025 was as follows: A. Changes in Capital Assets Used in Governmental Activities Capital assets, not depreciated Land Capital assets, depreciated Buildings Office equipment Infrastructure Total capital assets, depreciated Less accumulated depreciation for Buildings Office equipment Infrastructure Total accumulated depreciation Net capital assets, depreciated Net capital assets Balance - Transfers and Beginning Completed Balance - of Year Additions Deletions Construction End of Year 2,500 $ - $ - $ - $ 2,500 914,253 13,975 95,005 - 1,916,854 - 2,926,112 13,975 - 928,228 95,005 - 1.916,854 2,940,087 (384,559) (24,834) - - (409,393) (20,595) (8,179) - - (28,774) (980,725) (79,268) - - (1,059,993) (1,385,879) (112,281) - - (1,498,160) 1.540.233 (98,306) - - 1,441,927 $ 1,542,733 $ (98,306) S - $ - $ 1,444,427 -27- _1 NOTE 3 — CAPITAL ASSETS (CONTINUED) 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, not depreciated Construction in progress $ $ 55,794 $ — $ — $ 55,794 Capital assets, depreciated Infrastructure 1,547,940 — 1,547,940 Less accumulated depreciation for Infrastructure (385,959) (31.889) (417.8481 Net capital assets, depreciated 1,161.981 (31,999) — 1 '� •��`�� Net capital assets $ 1,161,981 $ 23,905 $ — $ — $ 1,185,886 C. Depreciation Expense by Function Depreciation expense was charged to the following functions: Governmental activities General government $ 34,177 Public works 77,354 Conservation and development 750 Total depreciation expense — governmental activities $ 112,281 Business -type activities Water $ 15,510 Sewer 16,379 Total depreciation expense — business -type activities $ 31,889 NOTE 4 — LONG-TERM LIABILITIES A. Components of Long -Term Debt Governmental activities General obligation (G.O.) bonds G.O. Refunding Bonds of 2015A G.O. Improvement Bonds of 2018A Unamortized premiums Total governmental activities long-term debt Final Balance — Original Issue Interest Rate Issue Date Maturity Date End of Year $ 775,000 1.25-2.90% 06/17/2015 02/01/2028 $ 210,000 $ 660,000 3.00-4.00% 07/12/2018 02/01/2034 435,000 645,000 9.671 -28- $ 654,671 NOTE 4 — LONG-TERM LIABILITIES (CONTINUED) B. Changes in Long -Term Debt Balance — Beginning Balance — Due Within of Year Additions Retirements End of Year One Year Governmental activities G.O. bonds G.O. Refunding Bonds of 2015A $ 275,000 $ — $ 65,000 $ 210,000 $ 70,000 G.O. Improvement Bonds of 2018A 475,000 — 40,000 435,000 40,000 Unamortized premiums 10,953 — 1,282 9,671 — Total S 760,953 $ — S 106,282 $ 654,67] $ 110,000 C. Minimum Debt Payments Minimum annual principal and interest payments required to retire bonds payable are as follows: Year Ending December 31, 2026 2027 2028 2029 2030 2031-2034 Total D. Description of Long -Term Debt Governmental Activities Principal Interest $ 110,000 $ 20,488 115,000 17,270 115,000 13,890 45,000 11,300 50,000 9,400 210,000 17,200 $ 645,000 $ 89,548 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 or special assessment revenue. E. Ultimate Responsibility for Debt All general obligation bonds are backed by the full faith and credit of the City. F. Conduit Debt Obligations Conduit debt obligations are certain limited obligation revenue bonds or similar debt instruments issued for the express purpose of providing capital financing for specific third parties. The City has issued Educational Facilities Revenue Notes, Series 2024 for a school in the amount of $3,260,000 with a maturity date of 2045 to provide funding to private -sector and/or nonprofit entity for a project deemed to be in the public interest. Although these bonds bear the name of the City, the City has no obligation for such debt. As of December 31, 2025, these bonds have an outstanding balance in the amount of $3,260,000. -29- NOTE 5 — INTERFUND BALANCES AND TRANSFERS A. Due To/From Other Funds Individual fund receivable and payable balances at December 31, 2025 are as follows: Receivable Fund Payable Fund Amount Sewer Enterprise Water Enterprise S 110,609 Interfund receivable and payable balances are made for the elimination of negative cash balances. B. Interfund Transfers Individual fund transfers during the year ended December 31, 2025 are as follows: Transfers In Governmental Funds Transfers Out Street Improvements Capital Project Governmental funds General $ 20,000 During 2025, the City made interfund transfers to provide additional funds for completing upcoming capital projects. NOTE 6 — NET INVESTMENT IN CAPITAL ASSETS The government -wide Statement of Net Position at December 31, 2025 includes the City's net investment in capital assets, calculated as follows: Net investment in capital assets Capital assets Not being depreciated Depreciated, net of accumulated depreciation Less capital -related long-term debt outstanding Total net investment in capital assets Governmental Business -Type Activities Activities Total $ 2,500 $ 55,794 $ 58,294 1,441,927 1,130,092 2,572,019 (654.671) — (654,671) $ 789.756 S 1,185,886 $ 1,975,642 -3 0- NOTE 7 — 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. Federal and State Funds Amounts recorded or receivable from federal and state agencies are subject to agency audit and adjustment. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of claims which may be disallowed by the grantor agencies cannot be determined at this time, although the City expects such amounts, if any, to be immaterial. -31- OTHER REQUIRED REPORTS THIS PAGE INTENTIONALLY LEFT BLANK L13 CARLSON l INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MAT"rERS 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, 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, 2025, 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 23, 2026. REPORT ON 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 were not identified. We identified certain deficiencies in internal control, described in the accompanying Schedule of Findings and Responses as findings 2025-001 and 2025-002 that we consider to be material weaknesses. -32- I (continued) REPORT ON COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the 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 RESPONSES TO FINDINGS Government Auditing Standards requires the auditor to perform limited procedures on the City's responses to the findings identified in our audit and described in the accompanying Schedule of Findings and Responses. The City's responses were not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the responses. 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. Respectfully submitted, LB CARLSON, LLP Minneapolis, Minnesota June 23, 2026 -33- LB CARLSON 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, 2025, 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 23, 2026. MINNESOTA LEGAL COMPLIANCE In connection with our audit, we noted that the City failed to comply with provisions of the miscellaneous provisions section of the Minnesota Legal Compliance Audit Guide fir 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 finding 2025-003. 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 — bid laws, depositories of public funds and public investments, conflicts of interest, public indebtedness, and claims and disbursements sections of the Minnesota Legal Complitoice 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, `j other matters may have come to our attention regarding the City's noncompliance with the above F 1 referenced provisions, insofar as they relate to accounting matters. J J CITY'S RESPONSE TO FINDING Government Auditing Standards requires the auditor to perform limited procedures on the City's response to the legal compliance finding identified in our audit and described in the accompanying Schedule of Findings and Responses. The City's response was not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response. -34- (continued) 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. Respectfully submitted, /,-X " 4-4-10 LB CARLSON, LLP Minneapolis, Minnesota June 23, 2026 -35- CITY OF GEM LAKE J Schedule of Findings and Responses Year Ended December 31, 2025 A. FINDINGS — MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING 2025-001 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. Questioned Costs — Not applicable. Context — The condition applies to multiple areas as noted above. Repeat Finding — 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. RD11 CITY OF GEM LAKE Schedule of Findings and Responses (continued) Year Ended December 31, 2025 A. FINDINGS — MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) 2025-002 MATERIAL AUDIT ADJUSTMENTS Criteria — Management is responsible for establishing and maintaining effective internal controls, which includes maintaining adequate internal financial records to facilitate the accurate preparation of the City's annual financial statements. Timely and accurate completion of journal entries is one element of internal controls for the preparation of annual financial statements prepped in accordance with accounting principles generally accepted in the United States of America to comply with state regulatory reporting requirements. Condition — During the audit of the year ended December 31, 2025, the auditor completed a journal entry in the following areas to keep the financial statements from being misstated by material amounts; accounts payable and utility expense. Auditing standards consider the identification of a material misstatement that was not initially identified by the City to be a material weakness in the related internal control. Questioned Costs —Not applicable. Context — The auditor completed a journal entry to keep the financial statements from being materially misstated. Repeat Finding — This is a current year finding. Cause — This was the result of an oversight by city personnel. Effect — The liabilities and expenses were inaccurately reported prior to making this adjustment. Recommendation — We recommend that the City review its internal control policies and procedures to ensure the proper preparation of journal entries for the preparation of the annual financial statements in the future. Management Response — There is no disagreement with the audit finding. The City will review internal control procedures to ensure the proper journal entry for accounts payable is prepared in the future. -3 7- CITY OF GEM LAKE Schedule of Findings and Responses (continued) Year Ended December 31, 2025 B. FINDING — MINNESOTA LEGAL COMPLAINANCE 2025-003 UNCLAIMED PROPERTY REPORT Criteria —Minnesota Statutes § 345.41 Condition — Minnesota Statutes require 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. This requirement was not completed by the City in the current fiscal year. Questioned Costs — Not applicable. Context — The City did not file the unclaimed property report timely to the state Commissioner of Commerce in the current fiscal year. Repeat Finding — This is a current year finding. ICause — This was an oversight by city personnel. Effect — The City was not in compliance with state unclaimed property requirements. Recommendation — We recommend that the City comply with state statutory unclaimed property requirements in the future. `J Management Response — There is no disagreement with the audit finding. The City will comply xvith state statutory unclaimed property requirements in the future. 10 I -i j -3 8- J THIS PAGE INTENTIONALLY LEFT BLANK