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Video-1: youtube.com/watch?v=_SPUN1oaoa0

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It's 4 p.m. I'll call this special city council meeting to order for the city of International Falls. Please rise and we will say the pledge. >> I pledge algiance to the flag of the United States of America and to the

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republic for which it stands, one nation under God, indivisible, with liberty and justice for all. For the record, all counselors are present and we will move to new

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business. The the purpose of this meeting was to discuss and be presented with the 2025 uh city audit which uh we are required to do annually. And with us we have Ryan Schmidt who uh

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is a partner at Schlenner Wener and Co. and historically has been our auditor. Ryan, can you hear us? >> Yes, I can. Can you hear me? Okay. >> Yeah, we can. Thank you, Ryan. The floor is yours. >> All right, perfect. Well, I will share

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my screen and I will walk us through a presentation I have prepared fairly similar to what I've done in prior years. All right. Can you all see my screen? Okay. Here. >> Yep. >> Yes. >> All right. Looks like it. Okay. So, um,

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moving into the first slide here. I like to just do a quick reminder for, uh, let everybody know what exactly is the purpose of our audit that we do each year and what are some of the procedures that we undergo and then we'll get into the results and the and some of the financial activities here. Um so from a

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high level the audit essentially consists of us obtaining your financial records and information from the past year uh 2025 and performing various procedures over this information uh kind of as you can see laid out on the screen here. So the vast majority of what we do

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is really the the last two items here sampling and detailed testing. Um, so in other words, we're looking at the transactions that are in the accounting system, you know, within each individual account and we're looking at the supporting details. We're looking at invoices and uh receipt documentation

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and reports from the county and from the state all to verify that activity because that's what comes together and makes up the numbers that are in the financial statements. And we've given you what's called an unmodified opinion this year as a result of these procedures. So that is a clean opinion

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and what you're hoping to achieve. The next page, this just kind of talks about, you know, how did the audit go. So yes, you did get the clean opinion, but did we have difficulties? Did we have a hard time getting the information we needed or did we see any unusual transactions or so on and so forth? As

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you can see from what's laid out on the slide here, everything went smoothly. uh things went well and uh nothing unusual from that standpoint to point out to you. Um the one I guess the one extra item that I do have down here is that there are a few estimates that are

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included in your financial statements. Um you know, there's some actuarial estimates that go into some of the pension numbers and and post-employment benefit numbers. And then also the ambulance receivables. You know, you have a running list of what's due, what's what's uh collectible for

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receivables in the ambulance fund. And then whether or not those are actually collectible and and the percentage of them that's collectible is always a bit of an estimate. Um so no different from prior years. Next page here uh here we have some

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internal control related matters. So as part of the audit we also have to look at the processes and procedures that are behind the numbers. And then we have some uh internal control or internal reporting related matters to to point

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out here. Um so the first one of these relates to audit adjustments. During the audit, we do uh prepare a number of year-end adjustments and and help get some of those balances from the cash basis to the full acrruel or to the acrruel basis of accounting. Um, next

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column here, uh, just due to the size of your city and and the limited number of people that are involved with the accounting function, uh, you do have a lack of proper segregation of duties with those accounting functions, which is very common for a city of your size.

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I would say every city we work with of your size, we we end up uh having that same finding reported in the reports. And then the second bullet point in that middle column, uh that's just explaining that we do prepare the financial statements of the city and since we're a

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third party, uh that's something we need to point out. And then on the right hand side, um this is something we'll get into a little bit later in some of the further slides here. Um but it's the same the same item we had noted last year about the ambulance fund. So um the

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ambulance fund of course has gone uh deficit. that's been in a deficit for years and that deficit has grown in recent years and as a result you know all of all of the city's cash is pulled together in in the same bank accounts

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but on paper it's very segregated into separate funds. So if you have deficits long enough to the point where all the cash in that fund gets used up and goes away, well then it goes negative and it's inherently borrowing from some of

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the other funds of the city. None in particular. I mean you you haven't designated, you know, we have to kind of choose each year what which fund do we think it's borrowing from. Um but it it is inherently borrowing from the other funds of the city. And because there's

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currently a a you know lack of a formal repayment plan then that raises the concern of okay is that interfund payable receivable actually going to be paid or received and until there's a plan in place then we consider that to

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be a a deficiency in in internal reporting here because um you know if we're reporting interfund receivables and payables then of course they need to be collectible. All right, move on to the next slide here. We'll touch on the ambulance fund a little bit later. Um, we also have to

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review your compliance with Minnesota statutes. So, the the office of the state auditor gives us some checklists related to each of these areas and we go through and we look at, you know, how did you go about contracting and bidding and where where do you keep your cash and investments, so on and so forth. And

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we didn't have any findings this year. So that was all clean. Okay, with that we'll get into the numbers here a bit. Um we have the general fund here for starters. Uh just a really big picture look at the last five years in the general fund and then

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we have the budget on the right hand side there as well. Um so overall just big picture comparison to the budget revenues exceeded budgeted amounts by about $435,000 and expenditures also exceeded budget exceeded budgeted amounts by about

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215,000. Um so overall you had budgeted for break even in the general fund but you actually had an increase in fund balance for the year of about 225,000. Now the next two pages break down those same revenues and expenditures into some

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smaller categories here into a little greater detail. Um so the the first page here focuses on the revenues and then we have the same one coming up for or the same layout for expenditures on the next page. Um so still just looking at the general fund here um comparing you know

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across the board in these smaller categories comparing to budget um you can see pretty close across the board in every category. Um intergovernmental funding is your largest revenue category. By intergovernmental we mean funding from other governments. So

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that's primarily state funding. Uh there's some county grants and and other items in there as well. Um here you were over about 218,000 just due to some additional state funding that came through during the year. And the other category where you had a

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bit of a difference on your budget was investment income. Here you were over about $145,000 over budget. Next slide. We have the same layout but looking at the expenditures of the general fund. Um just running across

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from left to right here. Um general government here you over budget about 185,000 variety of items driving this IT and software costs repairs and maintenance professional services. Um public safety and public works very close to budget in

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both those categories. Um same with parks and wreck. Airport here you were under budget. um the you know the the funding you provide to the airport as you know it's split between permanent funding um versus just borrowing that happens for for their projects on a

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temporary basis. Um so the permanent funding is what we're looking at here and that was under budget about 179,000. Uh other expenditures variety of items here economic development insurance uh appropriations

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etc. Here you were overbudget about $134,000 mostly due to some tax abatements that occurred during the year and capital outlay. Not a whole lot of activity there. All right, the next slide here. We're

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looking at the still just the general fund. Uh we're looking at the unrestricted portion of your fund balance as a percentage of your annual budgeted expenditures. Um so this is a slide I've shown every year uh you do have a policy in place to maintain a

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minimum for this for this ratio of 50%. Um so this is uh taking just that at the end of the year that unassigned or or unrestricted portion of your fund balance as a percentage of annual budgeted expenditures. You can see you're at about 52%.

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Um with that being said we'll also look at the cash on the next slide. um because included in that in that previous slide included in this ratio is amounts that are due to the general fund from other sources and that's consisted

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of a number of different things over the years. Um so there's kind of a lot going on on this next slide here in terms of of lines, but I'm going to kind of walk through the purpose of each one here and explain uh what's going on with the cash in the general fund. So the blue line

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that you see here, that is just typical. That's just cash. That's the cash that's in the general fund. The red line is the amount that's been borrowed to the airport commission every year for the past 5 years. Um so you can

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see that that has increased significantly in 2025 uh just due to some of the projects they've had going on out there. Um and then the additional funding that they've needed. And then the green line is the amount that's been borrowed to other

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funds of the city each year. So in prior years that deficit in the ambulance fund that that's always been taken out of the general fund. And the reason for that is because it was well you know the general fund is kind of your catchall and it's

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been assumed that okay if the ambulance goes into a deficit it's borrowing from the general fund. Well, this year, because of the amount that's already been borrowed to the airport fund in the red line here, there wasn't enough free

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cash available in the general fund to actually borrow to the ambulance fund. So, that's why we have this green line at zero. He's saying, okay, nothing's been borrowed to other funds here from from the general fund. Those those ambulance borrowings came from other

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funds. We'll show that in a few slides. Um, but instead you have a significant portion, I believe it's about 3.5 million borrowed to the ambulance fund or I'm sorry, to the airport uh commission at the end of the year. And

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then the purple bar is just all three of those lines combined. And you can see that that's why that one's a little more stable is because regardless of the borrowings and and back and forth that's happening over the years here, the purple is the sum of all the other lines. Um so that that holds a bit more

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stable and it's actually increased on an aggregate basis. Now, the part that um I would say I maybe have some slight concern with with that ambulance fund borrow I'm sorry, the the airport fund borrowing borrowing to the airport is shown on this slide

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here where we have a bit of con bit of a comparison going here between um for the airport what's been borrowed from the city and the county each year compared to what is actually due back to the airport for grant receivable. approvals.

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Um, so as you can see the the red and the blue, you know, back in 2023 and earlier, the amount that was borrowed from the city and the county, you know, which is which is to be repaid when the grant dollars come back in, that was

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always less than what they had for a grant receivable at the airport. um in 2024 and now again in 2025, the receivable on those grants is actually less than what's owed back to

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the county and and the city. And the reason for this, I think the primary reason for this, you know, there's a bit of timing happening here as far as when when we're able to record the receivables on those grants. Um but also what happened is that there was a change in the funding model being used by the

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county and the city uh back around 2022 or or somewhere in here between 2022 and 2023. you know, when when payments were made uh to to the airport prior to that, it was always very clear that, okay,

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these payments here are specifically for funding the capital projects, you know, the the portion that's going to be repaid by federal dollars when the grant comes in. So, that was just temporary lending. And then every project also has certain pieces to it that need to be

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financed locally via local dollars. So then separate payments were made by the city and the county specifically as as permanent payments to just fund that local share of those project costs. And back around 2022 2023 that stopped being

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separate there. It was just intermingled where amounts seemed to be uh borrowed to the airport as needed to finance these projects. But it's there's no there's no distinguishing between which payments are temporary borrowing versus

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which payments are being paid and and you know our permanent financing for that local share of those projects. So that's that's what I believe has created what we're seeing here where now the receivable is actually less than than the borrowings. [clears throat] Um

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because it's just been it's being treated entirely as borrowings at this point and and in reality part of this probably should be permanent funding. Okay. So that's that was my my airport uh related information.

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Uh back to the ambulance fund here. So the ambulance fund um you can see this is the cash over the past 5 years. Uh it's it's been on a downward trend. you know, you had some additional uh funding that came through from the state, I

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believe, in 2023, and then and then in 2024 again, you had about oh, $270,000 of uh onetime state funding. And that state funding dropped off in 2025. Um so, you know, even though expenses did

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go down in 2025 by about 55,000, uh compared to the prior year, the the cash deficit still grew. Um, [snorts] so you can see the the cash deficit here grew by approximately 585,000 from 2024 to 2025.

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Um, so uh, as of right now, I I mentioned, you know, this is no longer being borrowed from the from the general fund because, uh, there there wasn't enough free cash there to cover this. Um, so instead, this has now been borrowed from some of your capital

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outlay reserve accounts. uh specifically your capital outlay fund and your permanent improvement fund um borrowed some from both of those uh in order to fully finance this this cash deficit of

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about 2.2 million. Now the next slide here shows those capital project funds. Um it's actually pretty similar to that slide I was showing for the for the general fund. Um, you know, we have we have all of your capital project funds wrapped together here. So, it's not just your

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capital outlay and your permanent improvement fund. It's your other capital project funds, too. Your your 9inth Street improvements, Banshell, uh, Keenan Drive, so on and so forth. Anything that's set aside for capital projects is included here. Um, and what

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we have is in the orange we have the cash in those funds. uh just cash. In the blue, we have what's been borrowed to either other funds or or to the ambulance fund in 2025. As I mentioned,

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it's entirely to the to the ambulance fund. That deficit's entirely being borrowed from this area. And then the purple is the two combined. Um so you can see that uh you know the purple is made up of you know the the cash or the fund balance in these capital project

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funds is made up of a combination of actual cash but then an even greater portion has been borrowed out to cover that ambulance fund deficit. All right. Uh with that we'll move on and just touch on some of your remaining

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funds here. Um, so here we have the EDA fund and the sales tax fund just because of the activity in these funds. They're considered major funds and and uh so they you know I touch on these briefly because there's greater dollar amounts happening here. Um but the EDA fund very

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very typical comparable activity to prior years. Um lease revenue is collected here uh for the Voyagers National Park facility and then that cash is transferred out to the corresponding debt service fund to make the debt payments. Um sales tax fund you

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sales tax collections as as the revenues and then transfers out to the debt service and capital project funds being financed by those sales tax collections. Um cash in both of those funds over the past five years. You can see both held

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pretty steady from 2024 to 2025. Uh not a whole lot of movement there. And then this is just all of your governmental funds combined. Um this is your your aggregate fund balances. So um assets minus liabilities for all your

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governmental funds. Um you can see uh about half or or a bit more than half is considered unrestricted. Um, so me just meaning that there's no legal restrictions over it. You know, like your sale your sales tax fund for example, the cash in that fund, that's

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that's got some legal restrictions where it needs to be used for specific types of projects. So that would fall into the red category here. Whereas the blue, this is cash that there's not a whole lot that's unassigned here, but it's cash that the city has discretion over.

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it's been um set aside for a lot of it's just been set aside for projects or for specific purposes. Um but the city h does have um authority. >> Um so included in this blue is of course receivables including the amounts that

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have been uh borrowed to the airport fund. Um so it's not just cash, it's also receivables etc. All right, touch on each one of your enterprise funds here briefly. Um, your

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water enterprise fund pretty comparable to the prior year. You can see the the operations uh is what's being shown in the graph at the top. Operating revenues were up about 16,000. Operating expenses down about 72.

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Overall income from operations of about 346,000 for the year. uh change in net position came out to a total of an increase of about 1.1 million. That's including capitalized projects being track transferred into the into the

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fund. Some various non-cash items. Um I I I like to focus mostly on operations here and you can see that's been pretty steady. Stewart fund, pretty similar story here. Operating revenues are up about 16,000. uh operating expenses down about

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173,000. Um what happened there is there was a spike in in 2024 a bit of extra charges for the sanitary sewer district um which dropped off in 2025. [clears throat] And the next slide shows the cash in both of those funds over the

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past five years. Um, as you can see, the the sewer fund from 2024 to 2025 held pretty steady, dropped off just slightly. Um, the water fund, there were a number of things happening there um for for contributing to that decrease. There was a balloon payment on the 2022

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A bonds of about 772,000. there were capital asset purchases of about 378,000 and then 600,000 was transferred out to capital reserves um for future capital purchases. Um so the combination of

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those items is what really caused that cash to drop off in the water fund. Okay, with that we'll look at kind of everything wrapped together here. This is the city as a whole. You know, rather than looking at individual funds, this is if we wrap it all together and look

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at all of your overall assets. Uh and then the next page has your overall liabilities as well. [clears throat] So from a big picture, you can see the assets of the city haven't moved a whole lot, especially the current assets. So, uh cash and receivables. um non or the

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non-current the capital assets that's increased a bit just due to the amounts that you've invested into your road and infrastructure improvements over the past uh year. Next page we have the same layout but looking at liabilities. Um as you can

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see overall liabilities have held pretty steady in aggregate. Um a bit less for current liabilities. Uh but then you did issue that 2025A uh bonds and as a result your long-term debt increased a bit. Um but overall

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pretty steady, pretty comparable to the prior year. And then this page just shows the net between the two. So the same assets from two pages ago um including you know infrastructure and non non-liquid assets

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uh the same liabilities from the prior page. That's the red and then the green is the net between the two. Um, so you can kind of see the the growth or the upward trend on a net basis with all of these long-term items included. And then finally, uh, just one slide

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here just kind of forformational purposes. This [clears throat] is just showing the future payments that are due on your outstanding debt each year. Um, so this this isn't the the balance of your debt each year. This is the amount of payment that is due each year. Uh,

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with blue being the principal portion of the payment and red being the uh interest portion of the payment. Um, so as some of these bond issuances get paid off or or the final payment occurs, you can see it drops off around 2032 2033.

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>> [clears throat] >> All right. Any questions? Questions from the council for Ryan? >> Well, thank you for your time, Ryan, and your work on um this audit. It's been a pleasure working with you.

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Um, >> yeah. Thank you. >> And we hope that you have a great Fourth of July. >> Thank you very much. Yeah, I appreciate it. You as well. >> I will find my

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agenda. >> [clears throat] >> Item two is to approve the 2025 annual audit as prepared by Schlenner Wner and Company. >> I'll make that motion. >> Thank you, Councelor Holden.

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Second and Councelor Wagner. Thank you. [clears throat] Is open for any and all discussion at this time. Seeing none. Oh, sorry. by >> is is is Ryan aware that we did have we

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have worked towards the ambulance debt we talked about you know because it said in there we didn't have a but we we are working towards it >> very much so okay >> um and I know that Betty and Emma have communicated with him on that

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>> um the I mean the bottom line on the ambulance debt is that we're going to have to pay it back. Um, I think in the way that Ryan has figured the books for this year, it makes the

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assumption on the resolution that we ultimately voted on that we committed to a long-term plan to pay it back. >> Yes. Um, so if we hadn't have done that and the ambulance was uncollectible, I think he would uh, and you can correct

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me if I'm wrong, Ryan, if it was all uncollectible and we had no plan to pay it back, our reserves would take um, a real big turn really at that point in time. >> That That's correct. Yeah, it would be a a very significant reduction in your

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reserves. So um I mean ultimately it's a logistical workaround that we need to uh watch very carefully.

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[clears throat] >> Thank you. >> I'll ask the question at this time. I I >> I >> I'll vote yes and the audit [clears throat] is approved unanimously. Thank you. >> Thank you once again, Ry.

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>> Thank you, Ryan. >> Thank you. Appreciate it. >> And thank you to the city staff that worked on this process. Um >> yes, >> this starts uh about the time uh this audit's finished.

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The next one probably starts or the communication does. >> Um there's no further business uh at this meeting and I will adjourn.