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this transmittal letter. Financial, Budgetary and Property Tax Cflntrols The City is required to undergo an annual single audit in conformity with the provisions of the Single Audit Act of 1984, the provisions of U.S. Office of Management and Budget Circular A- 128, Audits of State and Local Governments, the provisions of Indiana Code section 5-11-1-9 and the requirements of the Indiana State Board of Accounts. For the last fifteen years {years ended December 31, 1990 through 2004} the City has received an unqualified audit opinion. The audit of the City's financial reports for the year ended December 31, 2005 is currently underway, and it is anticipated that these financial statements will also receive an unqualified audit opinion. In accordance with Indiana statutes, the City maintains budgetary controls integrated within the accounting system. The objective of these budgetary controls is to ensure compliance with legal provisions embodied in the annual appropriated budget which is adopted by the Common Council and then reviewed and approved by the Indiana State Board of Tax Commissioners. Activities of the general fund, certain special revenue and capital project funds and debt service funds are included in the annual budget. The level of budgetary control {that is, the level at which expenditures cannot legally exceed the appropriated amount) is established by major budget classification within funds. The Common Council may transfer appropriations from one major budget classification to another within a department by ordinance as long as the total appropriations far that department are not exceeded. Transfers from one department to another, or additional appropriations in excess of the original budget, must be submitted to and approved by the State Board of Tax Commissioners after an ordinance has been passed by the Common Council. In addition to budgetary and other controls established by Indiana statute, the City must operate within specif c and rigid controls governing the amount of property tax it may levy. The property tax control program, which began in 1973, limits the amount of property tax that may be levied by each unit of government in its legally budgeted funds. The fatal amount of property tax levied by the unit may increase by the six year average annual growth in Indiana personal income, as calculated by the U.S. Bureau of Economic Analysis, with a 6% maximum. In addition, if the unit finds that it cannot maintain basic governmental services for its residents within the property tax "freeze," it may appeal to the State Local Government Tax Control Board for an "excess levy" in certain specific instances. As a part of the property tax control program, the state transfers an amount generally equal to 20% of the total property tax levy (except for debt service levies as described below) to the County Auditor to be distributed to each taxing unit as a replacement for 20% of the property taxes levied. This "property tax replacement" is funded through the state sales tax. The levy for Debt Service funds is controlled via a review and approval process by the State Local Government Tax Control Board {witlr a subsequent review and approval by the State Board of Tax Commissioners) for each issuance of general obligation indebtedness {or lease- purchase) entered into by a taxing unit In addition, any indebtedness incurred after 19$3 no longer receives the 20% state property tax replacement funds. A historical view of the City's tax rate and its net assessed valuation has been included at the end of this letter. South Bend - Strategic Planning and Performance Measurement vii