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City of Key West, Florida CURRENT YEAR FINDINGS AND RECOMMENDATIONS: 2009-01: Adopt a Formal Cost Allocation Plan The City has not adopted a formal cost allocation plan that details the various methodologies used to support expenditure allocations such as: 1) payments in lieu of taxes (PILOT) from each enterprise fund to the general fund and 2) charges from the internal service fund to every fund/department for various insurances. This situation has caused and may cause future delays in the approval and payment process of grant funding to the City. We recommend that the management of the City develops a formal cost allocation plan, reviewed annually, that reflects a measurement of costs charged to the individual funds/departments. Management's Response: The City strongly endorses the need for a formal cost allocation plan. The City has requested cost proposals from its financial consultants. Proposals have been received and are under review. The goal is to award a task order and complete the cost allocation plan by September 30, 2010. 2009-02: Adopt a Formal Fund Balance Policy We recommend that the City establish a formal fund balance policy. This policy should be tailored to the needs of the City to insure against unanticipated events that would adversely affect the financial condition of the City and jeopardize the continuation of necessary public services. This policy should ensure that the City monitors and maintains adequate fund balance/net assets and reserves in the City's various operating funds to provide: I) sufficient cash flow for daily financial needs, 2) secure and maintain investment grade bond ratings, 3) offset significant economic downturns or revenue shortfalls, and 4) provide funds for unforeseen expenditures related to emergencies. As the policy is developed, the City should consider the new Government Accounting Standards Board (GASB) pronouncement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions" that will become effective for the fiscal year ending September 30, 2011. Management's Response: The City's policy has always been to maintain between 90 to 120 days of unreserved fund balance in each fund, The City fully supports the need to formalize this policy and will prepare a resolution for adoption by the City Commission. Such policy should not only establish a sound unreserved fund balance level but establish an action plan required when balances fall below acceptable levels. Section 1O.554(1)(i)4., Rules of the Auditor General, requires that we address violations of provisions of contracts or grant agreements, or abuse, that have an effect on the financial statements that is less than material but more than inconsequential. In connection with our audit, we did not have any such findings. Section 1O.554(1)(i)5., Rules of the Auditor General, provides that the auditor may, based on professional judgment, report the following matters that have an inconsequential effect on financial statement, considering both quantitative and qualitative factors: (1) violations of provisions of contracts or grant agreements, fraud, illegal acts, or abuse, and; (2) control deficiencies that are not significant deficiencies. In connection with our audit, we did not have any such findings. 9