(Municipal Audit Commission AMC 2.11.010)

November 20, 2013 2:00 p.m.

 
 

Call to Order

Administrative Services and Finance Director Tuneberg called the meeting to order at 2:00 p.m. in the Siskiyou Room at 51 Winburn Way, Ashland.
 

Roll Call

Committee Members

• Committee Member Thomas Hepford                                         Present
• Committee Member Carol Voisin                                                Present
• Committee Member Roberta Stebbins (Chair)                          Present
• Committee Member Chuck Keil                                                   Present
• Committee Member Barbara Christensen (Non Voting)           Present

 

Staff Members in Attendance:

City Administrator Mr. Dave Kanner
Administrative Services and Finance Director Mr. Lee Tuneberg
Parks Director Mr. Don Robertson
Accounting Manager Ms.Cindy Hanks
CPA Mr. Kenny Allen
Administrative Assistant Ms. Kristy Blackman (Minute Taker)
Ms. Rachel Dials – Parks                                                                       Staff Audience

 

Three members of the public were also in attendance.
 
Committee Member Stebbins raised the issue that there was some confusion to who was Chairing the meeting. It was agreed based on advice from Mr. Tuneberg to move a motion to decide during the course of the meeting.
 
A MOTION WAS MADE by Committee Member Voisin and seconded by Committee Member Hepford to elect Committee Member Stebbins as the future chair of the Audit Committee meetings.
THE VOTE: Unanimous Ayes
 
Ms. Christensen announced that Budget Committee Liaison Committee Member Keil’s term on that committee will expire on December 31, 2013, that he has decided to not be reappointed, and that she will be initiating the process to find a new budget committee member.
 
Dave Kanner arrived 2.05pm.
 

 
Approval of Minutes

With no questions or corrections to be made, Committee Member Stebbins announced that the Audit Committee Minutes of October 22, 2012 & the Audit Committee Minutes of December 6, 2012 shall be approved as presented.

 
Presentation by the Auditors
Representing Pauly, Rogers, and Co., P.C. (PR&C), a certified public accounting firm engaged by the City to perform auditing services, Mr. Allen presented the City of Ashland Comprehensive Annual Financial Report (CAFR), the Parks Comprehensive Annual Financial Report (CUFR), and Management Letters to the City of Ashland and the Parks and Recreation Commission.
 
Purpose of the Audit
Mr. Allen summarized the audit process and stated that the purpose of the audit was to determine if fair presentation of the financial statements and compliance with generally accepted accounting principles and auditing standards, applicable Oregon Municipal Audit Law and Administrative Rules, and Federal, State and other agency rules and regulations related to financial assistance had been accomplished.
 
CUFR
 
Results of the Audit
Mr. Allen called the Committee’s attention to page 1 of the CUFR for the fiscal year ended June 30, 2013, and affirmed PR&C’s unqualified opinion on the City’s and Park’s financial statements.  He clarified that an “unqualified opinion” meant the reports had been given a “clean” opinion with no reservations.
 
 
Parks Management Letter
Mr. Allen presented the management letter and quoted the findings listed in the Parks Management letter.
 

• As we’ve noted in previous audit is the relationship between the City of Ashland and the Ashland Parks and Recreation Commission is ambiguous.  We have noted that financial functions are split between the City staff and the Parks staff which can lead to unintentional misunderstandings over who is responsible for what specific duties.  During the course of the FY2012-13, an academic and legal conversation started in regards to the Parks’ legal status.  Although this is not an auditing issue, because we rely on attorneys for legal issues, it does raise the issue of what is the exact relationship between the City and Parks.  We recommend that the City and Parks consult with the City attorney, as well as outside attorneys, to develop a clear understanding of the Parks’ legal status.  We also recommend that the City and Parks do an exhaustive review of every part to clearly define it; whether it be human resources, accounting, rights and duties of the Parks Board, and many other areas.  This relationship, whether it is legal or managerial, needs to be clearly defined in order to prevent misunderstandings between the entities as well as errors.

 
 
Committee Member Voisin asked Mr. Allen for his opinion regarding the transferring of funds between the City and Parks without a clearly defined document stating their relationship.
 
Mr. Allen responded that this relationship has been an ongoing one and if the question is one of legality he would not be able to respond. Committee Member Voisin clarified that she is concerned that there could be accounting problems and asked what his opinion was on that specifically.  Mr. Allen explained that if the Parks Department was deemed to be a non-separate entity, the implication for accounting would be exhaustive, including the shut downs of Parks PERS, Payroll, etc and merging them into the City. Either way there would still be a large amount of work for accounting.
 
In response to Committee Member Voisin’s question regarding the need for two separate auditing companies, Mr. Allen explained with reiteration from Mr. Tuneberg that it is performed that way for convenience and it would also not be feasible to perform separate audits as this would require separate bid processes.
 
Ms. Christensen questioned if there would be any change in the audit process if Parks was deemed to be a non-separate entity. Mr. Allen responded that there would not.  
 
Committee Member Keil questioned if, as a result of measure 5 and the consolidation of taxes, had there been a consolidation of accounting and personal services between the City and Parks, and will what Mr. Allen is suggesting be the next step in this process. Mr. Robertson responded that at one time Parks maintained their own accounting department but this was phased out approximately 10 years ago. He explained that Parks now relies on the City for a number of services. This change in structure was a result of measure 47. Mr. Robertson clarified that Mr. Allen is suggesting the Parks Department construct a Memorandum of Understanding similar to the one they are using.
 
Responding to a request by Mr. Kanner, Mr. Allen explained in detail about GASB 61, relaying that it is a new accounting standard that defines a component unit. He went on to convey GASB’s desire to have fewer component units. He explained that from an accounting stand point it is also about defining the relationship between City and Parks and what are their financial benefits. Committee Member Keil asked if the Auditor makes the choice about non-separate or separate entities to which Mr. Allen answered that the Auditors did not make that decision, it is management’s decision.
 
Mr. Kanner spoke about issues that he believed Mr. Lohman was facing in regards to legalities involved with the segregation and how it will impact City and Parks in the future.

1. Legal liability - Parks commission cannot be sued therefore the City carries all liability.
2. Debt issuance - Parks does not have the ability to issue and assume debt.

Mr. Kanner went on to explain that Mr. Lohman will have to deal with these issues before rendering an official opinion. He mentioned that there was some difficulty reaching this legal opinion because of some of the contradictory language in GASB 61.
 
Mr. Allen mentioned the new accounting pronouncement, GASB 63 which introduced the terms deferred outflow and deferred inflow. He explained that next year GASB 65 will further define deferred outflow and deferred inflow being deferred revenue such as property taxes. This will now be defined as assets + deferred outflows = liabilities + deferred inflows + equity as opposed to assets = liability + equity.
 
Mr. Allen referred to GASB 67 & 68 that deals with pensions. He stressed that it is important to recognize on the government line under financial statements, the portion of PERS unfunded actuarial liability. Mr. Allen referred to page 8 of Parks as an example. He noted noncurrent liabilities and how this now needs to be changed and how City and Parks needs to utilize the unfunded actuarial liability. He stated that this is a new standard which could be implemented 2014-15. He noted that at this time it has not been determined who will be responsible for this calculation and that he is hopeful that it will be PERS. Mr. Allen’s opinion is that this could be a substantial liability.
 
Committee Member Hepford asked if there would be an audit put in place to check that these calculations were being done correctly to which Mr. Allen responded that they the Auditors would be watching over this.
 
In response to request from Ms. Christensen to elaborate on the background of this subject, Mr. Allen explained that in 2003 when GASB 34 was created and introduced the statements that are now on pages 8 & 9, GASB wanted everything to look like a for profit. Statements changed for the bond company’s benefit, as they would take information from all different areas and they wanted all information on one document.
 
In response to Committee Member Voisin’s question asking how this would affect us Mr. Allen responded that it would affect us through bond ratings even though they already factor this in, it would now be more transparent.
 
Mr. Kanner noted that Milliman do own their actuarial biennially and asked if the City should do its own in the off year. Mr. Allen recommended not doing this. Mr. Tuneberg added that Milliman does the City’s biennially.
 
Committee Member Stebbins asked if the major initiatives on pg 3 paragraph 3 were still relevant. Mr. Robertson responded that while it is not recent, it is in fact relevant.
 
Committee Member Stebbins complimented Mr. Robertson on 4^th paragraph of pg 3.
 
In response to Committee Member Hepford asking Mr. Robertson to clarify the meaning of MOU, Committee Member Stebbins suggested having this spelled out in the letter in the future.
 
Committee Member Voisin repeated her question that she had previously submitted to Mr. Tuneberg (In the CUFR, the 2013 statistical section pg. 57 and 58, the column “Outstanding Delinquent Taxes”, year 2011-12, the $370,792 seems to have been transferred) regarding delinquent taxes (receivables) She stated that she still wasn’t clear on why it went into the general fund and not Parks.
 
Mr. Tuneberg recited the footnote on page 58 of the CUFR. He went on to explain how a decision was made that when property taxes were placed in the general fund; receivables would follow. Committee Member Voisin asked if this was correct even though it was in the budget of 2013-2015. Mr. Tuneberg stated that was correct and that this was guidance from the Audit Committee. Mr. Allen explained that Parks no longer received property tax revenue after the end of fy2013 and that all receivables should be in the City’s general fund. The way in which management budgeted had an influence on this decision. He stated that this was a Council and Budget Commission decision. Referencing pg 40 of the CAFR Committee Member Stebbins pointed out that if you look at the City receivables, they have increased.
 
Committee Member Keil asked where the statistical table was. Ms. Hanks directed him to 116 of the CAFR and explained that an increase will not show up here since it was a merged statistical page of City and Parks.
 
Committee Member Keil asked for clarification on why the City document shows everything and Parks only show a subset. Ms. Hanks replied that this is true of property tax revenue. Ms. Hanks then referred to the statistical pg 108 of the CAFR which shows the City’s entire assessed property tax value. All City and Parks property taxes are going to be a blended amount in the CAFR, however in the CUFR it shows only Parks.
 
Committee Member Keil noted that while he could see the direct and overlapping government stats e.g. Park, old YAL and some county and school, on the statistical section Parks pg 55, he could not see the rest of the City of Ashland. Ms. Hanks explained that GFOA did not want the City of Ashland property taxes in Parks book, only the Parks portion in the City book. GFOA felt it was irrelevant.
 
Committee Member Keil noted that the Jackson County ESD and RCC show as nil balance for 4 years and questioned if this was correct. Ms. Hanks responded that she would check into this.
 
Committee Member Christensen reverted to the discussion about the property taxes being combined in the CAFR and Parks being separate in the CUFR, and reiterated that the same formula is used in the CUFR.
 
Committee Member Keil pointed out that this was confusing.
 
Ms. Christensen asked if in the future would there be only one property tax statistical sheet or would they be separate. Mr. Allen replied that all property tax information would be removed from CUFR as it relies on the City’s major source of revenue and in the past it had been property taxes. Mr. Allen reassured the committee that next year it should be a lot less confusing. It should only show the charge for service between City and Parks. Mr. Robertson clarified that charges for services is the payment of revenues to support operations.
 
Committee Member Hepford referred to pg 5 CUFR and asked why there was no operating grants or contributions in 2013, but the miscellaneous income had doubled from 2012-13. Ms. Hanks responded that grants are sporadic and not always available and this creates and ebb and flow of grant money. It was then explained by Mr. Robertson that additional miscellaneous income was revenue from a cut down tree.
 
Committee Member Hepford referred to pg 6, paragraph 2 and noted that there is a referral to a report on pg 22, however he could not locate this report. Ms. Hanks agreed that this is misleading and she will update the wording.
 
Committee Member Hepford noted that on page 71 first paragraph the year end date is wrong. Ms. Hanks agreed also to correct this.
 
Committee Member Voisin question what the $5.5 million leasehold improvement was on pg 5 under capital assets. Mr. Robertson explained and Ms. Hanks reiterated that it was the value of the Shakespeare theatres at the end of the financial year and includes the Bowman and the Elizabethan, not the new theatre.
 
CAFR
 
Results of the Audit
Mr. Allen called the Committee’s attention to pg 3 of the CAFR for the fiscal year ended June 30, 2013, and affirmed PR&C’s unqualified opinion on the City’s and Park’s financial statements.  He clarified that an “unqualified opinion” meant the reports had been given a “clean” opinion with no reservations.
 
Directing attention to page 143, which contains a non-inclusive list of areas tested for compliance, Mr. Allen reviewed the State of Oregon regulations and minimum standards for the audit and stated that no exceptions or issues requiring comment were found.
 
Lastly, Mr. Allen presented the Federal Single Audit Act opinion relating to compliance of expenditure of federal monies on page 145 and explained that PR&C selected randomly, grants over the amount of $250,000. He stated that PR&C found no issues requiring comment.
 
City Management Letter
Mr. Allen noted that the City of Ashland’s management letter, located on page 153, was incorporated into the CAFR pursuant to the Federal Single Audit act. Mr. Allen then went on to discuss the conditions that were listed on Pg 153 that were found as a result of the Audit.
 
Condition 1
PR&C noted that all staff at the Courts Department can make manual changes to court charges within the system. Good internal control requires that the all manual changes be reviewed by someone other than the preparer and that not all staff have access to make manual changes. It was noted that a lack of segregation of duties causes this issue. Court transactions could be processed incorrectly or theft could be perpetrated by pocketing cash and manually reducing individual court charges. PR&C recommend that someone in management, other than the preparer, review all manual changes in the Courts Department.
 
Mr. Tuneberg explained that because of the lack of staff, and the need for people to be able to perform all steps, there is no real good way to segregate duties and not overload operations. He noted as a result of this, an attempt was made to introduce new software, however this proved unsuccessful. The alternative was to increase the review and sign offs by someone outside the office doing the work. The office reports to the department manager a list of transactions performed and she reviews them and determines if more information or steps are needed.
 
Committee Member Stebbins asked if Mr. Allen thought this solution would clear the comment in the future and he agreed that he thought it would.
 
Committee Member Keil raised the question of what a manual change was considered in the system. Mr. Tuneberg explained that a manual change is when an un-corroborated change to a record occurs at the hands of staff. Committee Member Keil then asked Mr. Tuneberg to explain how that is different to what would normally occur. Mr. Tuneberg explained that in Utility Billing (UB) system, there are rules that state that you cannot make a change to a record without another employee signing it off.
 
Committee Member Keil asked what the changes were that you could make in the courts and how that is pertinent to the condition noted. Mr. Tuneberg used the example that the courts hold payments for DUI charges and that if a citizen is offered a refund in exchange for attending a DUI class there is the risk of inconsistency if the staff member completes the refund without it being signed off.
 
Mr. Robertson reiterated noting that you can change speeding tickets with a judge’s consent to lower the fine. Committee Member Keil then asked why this couldn’t be restricted to which Mr. Tuneberg responded that with a smaller staff it was more difficult to restrict the software so that only one person could perform each duty.
 
Ms. Christensen raised the question of whether we were using old UB software. Mr. Tuneberg replied that the City does use Springbook for accounting for utilities, and the majority of it is revenues and expenditures; however it also uses a reduced version of the old software for tracking the internet portion.
 
Ms. Christensen asked who has the ability to assign rights to staff to make these changes. Mr. Tuneberg responded that Management is responsible. Committee Member Christensen then asked if the courts have the same right to assign or restrict to which Mr. Tuneberg replied that they most likely do have those rights, however they do not utilize them because they face the same problem of having a smaller staff base.
 
Condition 2
PR&C noted that the Information Technology (IT) department does not have a cohesive written internal control document that details out their internal controls over their internally developed UB system. It was recommended that that IT department have an external review of the processes and controls from an outside entity. It was noted that good internal control requires that internally built systems have written controls and best practice controls in place. Additionally, an internally built system normally does not have the controls in place that an externally generated system would, therefore transactions could be processed improperly in the UB system.
It was recommended that the IT department should document their internal control procedures over the internal UB system, and consider getting an external review of their processes.
 
Mr. Tuneberg noted that with the change in managers and approaches within the IT department, the documentation has gone through several changes. A version of this document should be available for review in December. The act of changing software and going to Springbook has created the need to rewrite how the document is worded.
 
Mr. Allen then commended staff for their assistance with the audit. He went on to praise management and staff for complying with the need for GFOA certificates, and how it was important to obtain these as they could potentially affect Bonds and Ratings favorably.
 
Committee Member Voisin requested that Mr. Allen explain the audit process. Mr. Allen explained that the audit process begins March – April. PR&C sends staff approximately 20-30 items that they will be auditing, varying from minutes, billing, payroll, etc. Mr. Allen spoke about the process of checking that transactions in departments like utilities, or payroll comply with adopted policies. Mr. Allen went on to explain how he would then meet with Mr. Tuneberg, Mr. Kanner and staff to discuss any issues that need to be looked at and how any important issues are then placed in the CAFR/CUFR as conditions.
 
Mr. Allen then stated that in late August they would get together with staff and go through balance sheets e.g. confirm cash amounts, receivables, and their reasonable collectability and check with accounts payable to make sure un-recordable transactions are in the correct year. He then noted that they would confirm debt, franchise revenues & confirm grants. Finally they would work with the attorneys and obtain the letter of confirmation showing legal & contingent liability.
 
Committee Member Stebbins requested clarification in regard to the amount at the bottom of Pg 49 under General Government Restricted Assets and whether the amount represented the cash that was available in the bank at that time. Mr. Allen responded yes. Committee Member Stebbins questioned why the City was disclosing this information.  Mr. Allen responded that it was public disclosure. Ms. Hanks questioned whether the title should be changed from Restricted Assets to Restricted Cash Assets and whether that title was misleading. Mr. Allen responded that it would be reasonable to change the title.
 
In regard to comment made by Committee Member Stebbins in relation to government and business type,  Ms. Hanks noted that we do not restrict that cash and stated that it is the restricted fund balance but not restricted cash. Mr. Allen recommended crossing off “business types” and inserting “restricted cash” as debt service. Ms. Hanks confirmed she would change the verbiage.
 
Ms. Hanks asked if her presentation on fund balance constraints on pg 55 is incorrect because the debt commitment is under committed and asked if this should be restricted. Mr. Allen answered that it should be restricted.
 
Committee Member Hepford referred to pg 74 and noted that there was no explanation for the budget variants for utilities in both expenses and revenues. Ms. Hanks explained that they tried to explain this in the MD&A however it did not translate very well. Ms. Hanks went on to explain that variances in the funds expenditures can be accounted for because of capital projects that may not come to fruition. Several projects were put aside and Telecom in particular delayed capital projects if they knew that their revenue is too low.
 
Committee Member Voisin asked what the materiality is.  Mr. Allen explain – differs, usually between 2% and 5%. This is not reflected in the CAFR.
 
Committee Member Stebbins, seconded by Committee Member Hepford and Mr. Tuneberg, complimented staff in the finance department for the receiving of the GFOA awards and the work that they perform throughout this process and their level of professionalism.
 
Mr. Tuneberg explained the audit process and the elaborateness of that process and how Mr. Allen is on the front line of information during this process. Mr. Tuneberg asked Mr. Allen if the City and Parks is one of the more complex entities to audit. Mr. Allen agreed that the City and Parks is one of the more complex because of the unique nature of the relationship between City and Parks.
Mr. Tuneberg noted that GASB used to have a requirement that the Auditor would audit the capability of the staff’s ability to perform their duties. This influenced the City to increase the skill level of staff. Mr. Tuneberg complimented Ms. Hanks on her work ethic and noted that while staff is so busy that they are often unable to get training on what is current, the relationship with the PR&C enables them to push through unheeded.  Mr. Tuneberg went on to compliment Committee Member Stebbins and Ms. Christensen on their contribution also.
 

Public Input

Cindi Dion of 897 Hillview Dr Ashland
Ms. Dion spoke regarding the City’s Shakespeare Theatre Assets mentioned in the CUFR.
In relation to the CUFR, Parks Management letter and Parks budget process and it is meetings, several members of the public were confused about what type of entity Parks is. Ms. Dion felt they were not getting a straight answer. Ms. Dion stated she now realized that this may be attributed to the fact that there is no document that outlines this. Ms. Dion noted that prior to today she was not aware that this was an issue, however she now see that this has been raised before. Ms. Dion would like to see a group from both the City and Parks create an MOU especially with the budget being a non tax revenue budget.
 
Next Ms. Dion stated that Shakespeare leaseholds are paid for by Shakespeare are they also kept on their books and asked does the City carry the value of the land as an asset, or is it just the leasehold improvements.
Ms. Hanks responded that she believes the City does carry the value of the land as an asset because the land is owned by the City. Ms. Dion also referenced that the parking garage may have added more value. Ms. Hanks agreed to email Ms. Dion regarding this issue.
 
 
 
Questions and Answers
Committee Member Stebbins acknowledged that questions and answers had been addressed throughout the course of the meeting.
 
A MOTION WAS MADE by Committee Member Keil and seconded by Committee Member Voisin to accept the Parks Comprehensive Annual Financial Report as presented or amended through Commission discussion.
 
THE VOTE: Unanimous ayes
 
A MOTION WAS MADE by Committee Member Hepford and seconded by Committee Member Keil, to accept the City Comprehensive Annual Financial Report as presented or amended through Commission discussion.
 
THE VOTE: Unanimous ayes
 
Committee Member Stebbins noted that the Siskiyou room was a desirable venue for the Audit Committee meetings.
 
At 3:30pm the Annual letter to accept the CAFR/CUFR was signed.
 
Committee Member Stebbins questioned the need for page 26 to remain in the CAFR as it seemed to be outdated. Mr. Allen responded that it does need to remain however, it was reasonable to change the word new.
 
Committee Member Stebbins asked if there were any new GASB requirements this year. Mr. Allen responded that GASB 63 called for Net Asset to now read Net position.
 
Ms. Christensen asked if there would be any big new GASB’s this next year. Mr. Allen responded that it should only be GASB 68 & 67 relating to PERS.
 
Committee Member Hepford asked if with depreciation changing and the change in what is capital and what is not capital according to outside agencies, will GASB also change their limits. Mr. Allen answered that GASB tends to follow suit a few years later.
 
Mr. Tuneberg noted that the CAFR & CUFR would now be sent to print and the resolution to accept the CAFR would likely be read at the December 17^th meeting. Mr. Robertson noted that the CUFR would most likely be sent to the December 23^rd Parks Commission meeting although that could potentially be pushed forward to the December 19^th.
 

Adjournment

 
The Audit Committee Meeting was adjourned at 3.35pm.
 
Respectfully submitted,
Kristy Blackman, Administrative Assistant