Presented by: Susan K. LaFollett CPA Managing Partner LaFollett and Abbott PLLC Certified Public Accountants March 17, 2014

 Objectives of Audit  Scope of Audit  Annual Financial Report  Financial Highlights  Summary of Audit Results  Required Governance Communications  Recommendations

 Objectives  Conduct our audit in accordance with Government Auditing Standards  Plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement

 Full Scope Audit  Governmental Activities  Business-type Activities – water, sewer and sanitation  Discretely Presented Component Units – Economic Development Corporation (EDC) Community Development Corporation (CDC)  Each Major Fund – General Fund and Debt Service Fund

 Financial Section  Independent Auditor’s Report (pgs. 1-2)  Management’s Discussion and Analysis (pgs. 3-7)  Government-Wide Financial Statements (pgs. 8-9)  Fund Financial Statements (pgs )  Notes to Financial Statements (pgs )

 Required Supplementary Information (RSI)  General Fund Budgetary Comparison (pg. 40)  Texas Municipal Retirement System (TMRS) Schedule of Funding Progress (pg. 41)

 Compliance and Internal Controls Section  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 (pgs )

 Statement of Net Position (pg. 8)  Statement of Activities (pg. 9)  Includes the Primary Government  Governmental Activities  Business-type Activities  Includes Component Units – Discretely Presented  EDC  CDC  Prepared on a full accrual basis

 Statement of Net Position (pg. 8): Total City Assets - $15,547,914  Primarily net capital assets of $12,400,794 Total City Liabilities - $9,326,639  Includes long-term debt of $8,113,757 with current portion of $478,469 due and payable in FY14 City’s Net Position - $6,221,275  Net Position equals the amount by which assets exceed liabilities

 Statement of Net Position (pg. 8): Net Position  Indicator of whether the City’s financial health is improving or deteriorating  City’s net position increased $124,840 or 2% for FY13 and $125,848 or 2% for FY12  Investment in capital assets $4,290,956 (total capital assets less related long-term debt)  Unrestricted net position is $1,069, 733 and may be used to meet the City’s ongoing obligations to citizens and creditors

 Statement of Activities (pg. 9): Total City Revenues - $5,442,299  Program Revenues - $3,509,698 – charges for services, grants, and contributions  General Revenues - $1,932,601 – property, sales, and franchise taxes Total City Expenses - $5,317,459 City’s Net Position increased $124,840 or 2% FY12 total revenues $5,252,186, total expenses $5,126,338, and net increase of $125,848

 General Fund (pgs. 10 and 12): Total Assets - $1,558,375 Total Liabilities - $929,146 Total Fund Balances - $629,229 Unassigned Fund Balances - $468,000  May be used to meet the City’s ongoing obligations  City’s General Fund has 1.82 months reserves Unassigned General Fund Balances/ Total General Fund Expenditures X12 months 3 to 6 months reserve is optimal

 General Fund (pgs. 10 and 12): Total Revenues - $3,066,899 Total Expenditures - $3,093,378 Net Change (decrease) in Fund Balances ($26,479)  FY12 - Revenues $3,221,153 Expenditures $3,300,059, Net Decrease ($78,906)  General Fund has seen a decrease in Fund Balances for the past two years

 General Fund (pgs. 10 and 12):  Total General Fund Revenues/Other Sources - decreased $154,254 (5%) from FY12  Ambulance Revenues – decreased $245,898 (41%) from FY12 due to a transition in third party billing agencies  Property Tax Revenues - increased $96,092 (12%) from FY12 due to adopted tax rate increases  Sales tax revenue increased $32,858 (6%) from FY12

 Water & Sewer Fund (pgs ): Total Assets - $10,905,170 Total Liabilities - $6,186,371 Total Net Position- $4,718,799 Unrestricted Net Position - $10,748  May be used to meet ongoing obligations  City’s Water & Sewer Fund has less than 1 month reserves Unrestricted Net Position/ Total Water & Sewer Fund Expenses X12 months 3 to 6 months reserve is optimal

 Water & Sewer Fund (pgs ): Total Operating and Other Revenues - $1,760,559 Transfers-in from Capital Projects Fund - $124,239 Total Expenditures - $1,915,455 Net Change (decrease) in Net Position ($30,657)  FY12 - Revenues $1,570,688, Expenses $1,644,128, Net Change (decrease) ($73,440)  Water & Sewer Fund has seen a decrease in Net Position for the past two years

 EDC – Discretely Presented (pgs. 8-9): Total Assets - $655,643 Total Liabilities - $199,791 Total Net Position - $455,852 Total Revenues - $114,577 Total Expenses - $57,750 Net Change - increase in Net Position $56,827

 CDC – Discretely Presented (pgs. 8-9): Total Assets - $183,772 Total Liabilities - $977 Total Net Position - $182,795 Total Revenues - $100,476 Total Expenses - $65,528 Net Change - increase in Net position $34,948

 Independent Auditor’s Report (pgs. 1-2) Unmodified or “Clean” Opinion Report Summarizes:  Management’s Responsibilities for the Financial Statements  Auditor’s Responsibilities

 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 (pgs ) Given the limitations and definitions per the report, we did not identify any deficiencies in internal controls over financial reporting that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified

 Per our Letter, Significant Audit Findings: Qualitative Aspects of Accounting Practices –  Sensitive estimates – allowance for uncollectible municipal court fines and ambulance services  Significant disclosures – long-term debt in notes Difficulties encountered in performing the audit – none Corrected and uncorrected misstatements – all recommended adjustments were accepted by the City Disagreements with management – none Management Representations – we have requested certain representations from management in a letter dated March 17, 2014

 Per our management recommendation letter, we became aware of several matters that are opportunities to strengthen internal controls and operating efficiency at the City  These recommendations should in no way be construed as derogatory  We recommend the City consider the following recommendations:

 We noted less audit adjustments to the trial balance in FY13 than in FY12. However, the City did not resolve several issues and adjustments until after the audit was in progress. We recommend the City continue to work closely with their consultant to refine year-end closing procedures to ensure all routine closing adjustments are posted before the audit begins.  Management accepts and agrees with this comment. City staff will continue to work closely with the consultant to finalize and post year-end adjustments before the audit begins.

 We noted the General Fund (GF) has an unassigned fund balance of $468,000 at FY13, which represents less than two months of GF operating expenses. We recommend the City continue to adopt budgets that will eventually increase the unassigned fund balances for the GF to an optimal amount of 3–6 months of operating expenses. Management accepts and agrees with this comment. City staff will continue to recommend budgets that will increase the unassigned fund balances and work closely with City Council to insure said balance is increased to the recommended amount.

 We noted the Water and Sewer Fund (WSF) has a net decrease in net position of $30,657 and an unrestricted net position of $10,748 for FY13. Further, we noted the unrestricted net position represents less than one month of WSF operating expenses. The n ewly adopted water rate increases may help these balances to improve during FY14. We recommend the City continue to adopt budgets for the WSF that will increase the net position and eventually increase the unrestricted net position to an optimal amount of 3–6 months of operating expenses.

 Management accepts and agrees with this comment. It is believed that the utility rate increases passed with the FY14 budget will produce an increased net position for the WSF. City staff will continue to recommend budgets that increase the unrestricted net position and work closely with City Council to insure said balance is increased to the recommended amount.

 We noted the City did not evaluate the collectability of municipal court fine receivables until during the audit. The balance for this receivable is significant and has increased during the year. We recommend the City review the court collection process and perform an analysis of the outstanding receivables balance to determine collectability and estimate the allowance for bad debts on a regular basis and at least before the audit begins. Further we recommend the City consider writing off old uncollectable amounts.

 Management accepts and agrees with this comment. The Municipal Court has an extensive collection process, which begins the day the citation is issued, and continues this process with multiple notifications to defendant from us until the case is turned over to collections where professional collectors try again to collect the balance. The collection agency has advised that the amounts they show as uncollectable are approximately 8% or less of our total outstanding amount. Since these receivables pertain to criminal court costs and fines, which included State of Texas court costs, we should be extremely hesitant in deciding to dismiss costs that belong to the state.

 We noted ambulance revenue decreased approximately 40% and the receivable balance increased approximately 8% from FY12. Although variances appear to be due to a transition in the third party billing agency, it is very important that the City monitor the collection process. Also, the City did not reconcile the revenue and receivables balances per the third party collection agency reports to the general ledger until during the audit. Per the collection reports at FY13, the City has approximately $5,175,000 of outstanding ambulance receivables with a large portion of the balance one or more years old. We recommend the City review ambulance collection process and perform an analysis of the outstanding receivables balance to determine collectability and estimate the allowance for bad debts on a regular basis and at least before the audit begins. Further we recommend the City consider writing off old uncollectable amounts.

 Management accepts and agrees with this comment. In transitioning from Intermedix to Emergidata and acquiring a Medicare revalidation the City was not able to collect Medicare payments for nine of the twelve months in FY13. All data to include outstanding debt was transferred from Intermedix to Emergidata as well. This transfer made the outstanding receivables unavailable for an extended period of time and did not become available to City staff until the audit process had begun. Currently, Emergidata is working to invoice and collect all outstanding debt and the City is collecting Medicare payments.

 We noted that monthly internal financial statements as presented to the City Council showed a negative balance for water revenue for the month of October Further investigation revealed that the negative balance occurred due to the manner in which unbilled revenue is accrued and recorded. The annual revenue for the year includes the 12 months of revenue for the period Nov 2012 to Oct 2013, which is correct based on billing cycles. We recommend the City consider utilizing a separate account for unbilled revenue and adjust this account at year end for the accrual. This approach will not distort budgeted water revenue in the internal reports.  Management accepts and agrees with this comment. City staff will implement the suggested procedure to report annual accounting accruals.

 We noted the depreciation schedule may contain fully depreciated capital assets that are no longer in service. This does not have a net effect on the financial statements given that assets are fully depreciated. We recommend the City review depreciation schedules and remove assets no longer in service.  Management accepts and agrees with this comment. City staff will work to identify current capital assets and update the depreciation schedule.

 Fiscal Year 2012 Follow up – Management has implemented the following prior year recommendations:  Reinstate fund 98 – General Fixed Asset Account Group and fund 99 – Long Term Debt Account Group, as required by GAAP.  Reconcile revenue per the court system to the general ledger system.

 Fiscal Year 2012 Follow up (continued):  Print details for court receivables, utility receivables, ambulance receivables, and accounts payable on the last day of the year and reconcile to the general ledger as part of the closing process.  Continue to follow check disbursement policies.

 EDC/CDC: Continue to refine the year-end closing procedures to ensure all routine closing adjustments are posted before the audit begins.  Management accepts and agrees with this comment. The EDC/CDC board treasurers and management have met and discussed ways to prepare for the audit, including closing procedures and adjustments, as well as, preparing the information on the request list before the audit begins.  EDC – do not record depreciation on land. Management implemented this recommendation.  EDC – implement internal controls to ensure that quarterly 941 reports are filed on time. Management implemented this recommendation.

 Thank you LaFollett and Abbott PLLC, Certified Public Accountants, would like to recognize:  Frank Baker - City Manager  Jennifer Gould - City Clerk  Eddie Peacock CPA - City Consultant  Kanita Larkins - EDC/CDC These individuals were very responsive to all of our audit requests and a pleasure to work with on this engagement  Questions or Comments?