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Town of Reading
Meeting Minutes
Board - Committee - Commission - Council:
Audit Committee
Date: 2014 -06 -03
Building: Reading Town Hall
Address: 16 Lowell Street
Time: 7:30 PM
Location: Berger Room
Purpose: FY13 Audit Results and FY14 Audit Planning
Attendees: Members - Present:
RECEIV10
TOWN CLERK
READING. MASS.
10 A 11� 02,
Barry Berman, Jeanne Borawski, Phil B. Pacino, Paul McNiece, Marsie West
Members - Not Present:
Stephen Herrick and Chuck Robinson
Others Present:
Sharon Angstrom, Ed Boyd and Scott McIntire
Minutes Respectfully Submitted By: Sharon Angstrom
Topics of Discussion:
Berman called the meeting to order and asked the Committee if they had an opportunity to
review the minutes from September 19, 2013. Borawski mentioned she had not received
the attachments by email but that she would abstain since she wasn't present on
September 19th. McNeice made a motion to accept the minutes as written which was
seconded by Pacino. The Audit Committee voted 4 -0 -1 to accept the minutes as written.
Berman instructed McIntire to begin the review of the FY13 audit results. McIntire started
by saying that in his opinion the audit went very well. The audit was pretty much completed
in November but due to the Town Accountant's maternity leave and some scheduling delays
we were forced to push this meeting out. He pointed out that no material journal entries
were proposed and that the records are in good working order. He noted that the auditor's
opinion is found on pages 1 -3 of the financial statements. He stated the opinion is that the
financial statements present fairly in all material respects, the financial position of
governmental and business -type activities of the Town of Reading.
McIntire then directs the board to turn to pages 10 -11 where the Manager Discussion and
Analysis begins. He points out that this section gives a snapshot of the General Fund. It is a
great resource as it summarizes the key elements of the General Fund. McIntire then points
out on the top of page 11 the unassigned fund balance as of 6/30/13 was just over $10.5
million up $780k from last year but as a percent of expenditures it went from 9.6% to
12.4 %. McIntire pointed out that this is a solid increase. He referenced a chart in the middle
of page 11 that summarizes the balances of the stabilization accounts as of 6/30/13 as
compared to 6/30/12 noting that the balances remain stable in these accounts.
McIntire then pointed out that at the bottom of page 11 there is a chart that provides a 6
year trend analysis of general fund balance. For 2013 total fund balance was just under
$14.2 million. The various components of the total fund balance are as follows rounded to
the nearest thousand:
Restricted for Debt Service $817
Committed for Stabilization 365
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Assigned for Encumbrances 1,087
Assigned for Subsequent Year Exp. 1,400
Unassigned 10,508
Total Fund Balance $14,177
McIntire then directs the Committee to turn to pages 15 -17. He notes that the Statement of
Net Position and The Statement of Activities provide a long term perspective. He points out
on the Statement of Net Position the unrestricted is $822,933 which is down from $1.2
million in the prior year. This decrease is mostly attributable to the OPEB liability. He directs
the Committee to look at an OPEB chart on page 50. He points out that for the
governmental funds $2,461,632 was paid in the form of payments of insurance premiums
and that an additional OPEB contribution of $800,000 was made to the OPEB trust. Despite
these contributions the OPEB liability still increased by $1,325,003. Berman asked if the
town hadn't contributed additional funds to OPEB would the unrestricted be negative.
McIntire replied that it is possible and not uncommon in other communities for this figure to
be negative due to the size of the OPEB liability. The OPEB liability for Governmental is
$12.6 million which is a big number. McIntire points out that in many towns the increase in
the OPEB liability is $6 million on average; the OPEB liability for Reading only increased by
$1.3 million. Berman noted that Reading had an upgrade on its bond rating to an AAA rating
and our funding of OPEB was noted as one of the factors noted in the upgrade. Berman
stated that very few people have heard about the upgrade. Angstrom confirmed the bond
rating update and mentions that the Town needs to get that information out to the
community. Berman states that our OPEB valuation was favorable as well. Angstrom
confirmed that our most recent OPEB valuation shows the liability significantly lower than
the prior valuation. The reason for this is improved discount rates due to the OPEB funding
that occurred since the last valuation. The General Fund is still unable to fully fund the ARC
but was able to contribute additional funds above the regular premiums. The enterprise
funds are fully funding their ARC for OPEB and will be paid off by FY2028. The town was
also able to keep health insurance rates stable. Angstrom also mentions that it is likely that
once the pension liability is fully funded more funds will be allocated to OPEB. McIntire
confirmed that other communities are looking at redirecting pension assessments once the
pension liability is funded.
McIntire continued on page 18 stating that the unassigned fund balance is $10,507,772 and
that this is the first place the readers of the financial statements flip to. He also points out
on page 22 that revenues exceeded budget by $1,440,938 and expenses were under budget
by $1,267,085, which netted to a favorable variance of $2,705,023. Pacino inquired why we
had such a favorable variance in employee benefits. Berman stated that is a line item they
also budget high. Borawski mentions that she believes health premium rate increases are
not known yet at the time the budget is compiled. Angstrom said she would look into it and
get back to him with a definitive answer. McIntire then states that the Statement of
Fiduciary Funds can be found on page 26. He notes that there is $2.8 million set aside in the
OPEB Trust between the town and RMLD contributions.
McIntire then directs the Committee to turn to page 20 to the Statement of Revenues,
Expenditure and Changes in Fund Balances. He points out that the in the General column
there is a deficiency of revenues over expenditures of $3,332,961. He points out that
although this appears to be concerning it is due the fact that Reading uses transfers in to
balance its budget. The largest among these transfers is the earnings distribution the town
receives from RMLD. Berman inquires why the RMLD earnings distribution is not recorded as
revenue. Pacino explains that these earnings are counted as revenue on RMLD's financials
thus we would be counting them twice if the town showed the distribution as revenue.
McIntire then mentions that the detail for the transfers is located in the disclosures on page
40 of the financial statements. While reviewing the detail transfers Borawski inquires what
the transfer from gifts and donations was for $75,000. Boyd stated he thought it was the
funds received from Reading Ice Arena. Angstrom said she believed that was correct but
said she would confirm that and let the Committee know definitively. McIntire thought it
was important to note to bond rating agencies that transfers in are consistently used to
balance the budget.
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McIntire then began reviewing the Management Letter with the Committee. He began by
stating that the comment from the prior year to enhance cut -off procedures was
satisfactorily resolved. The second comment from the prior year to update the existing fund
balance policy has not been resolved as of yet. McIntire stated that updating fund balance
policy will provide spending prioritization. For example you have a new library project and
you may be receiving a grant, there may be debt and free cash. The fund balance policy
would make it clear the order in which the money is spent, i.e. grant funds first then debt
proceeds then free cash. McIntire explains that having a fund balance policy in place helps
to perfect the classification of fund balance at year end.
McIntire stated the only management letter comment for the current year is to improve
internal controls over change orders and adjustments. Angstrom stated there was a memo
in your packet detailing the issue that was identified. Essentially Engineering went out to bid
for road paving and awarded a contract based on the estimated work outlined in the IFB.
Extra funds were made available through 40R Smart Growth payments for additional
paving. There are implied pressures to get as much paving done as possible. They added
the work to the current contract causing it to go over by more than the suggested 20 %.
This occurred by issuing more POs then the contract amount. McIntire stated that puts the
town at risk for overspending and that the Engineers never asked the Town Accountant to
recertify that the funds were available. Angstrom stated they are doing this now but a PO
cannot be issued without the funds being available but there is still some risk that work
could be authorized and later they could determine they don't have the funds to pay for the
work. If that was the case we would have to go to Town Meeting to get the funds. Angstrom
stated she sat down with each Engineer to go over the issue and explain what needs to be
done going forward. Angstrom also stated she asked each Engineer a series of fraud related
questions to determine if there was some other motivation to give the additional work to
Aggregate. Angstrom stated she did not feel there was any motivation to favor one
contractor over another. During her review of the contracts in Engineering she did find the
problem occurred with a smaller sidewalk project as well but again the extra 40R funds
likely lead to the issue.
McIntire then directed the Committee to turn to page 75 to the Schedule of Funding
Progress. The top of the chart shows the funding status for pension and the bottom shows
the funding status for OPEB. He points out that due to GASB 68 in FY15 the unfunded
pension liability of $43 million will appear on the balance sheet as a liability. It is expected
that in FY18 the full unfunded OPEB liability, which is currently $64 million will appear on
the balance sheet. Berman commented that will make the balance sheet look terrible and
obscure the good. McNeice stated they don't want you to hide the bad either. McIntire
agreed but stated that all the other cities and towns are in the same boat. McNeice stated
that Reading will likely look less ugly than its peers.
Pacino then moved to accept the Audit and Management Letter. West seconded the motion.
The Audit Committee voted unanimously (5 -0) to accept the audit and management letter.
The discussion was then shifted to areas of specific audit interest for the FY14 audit. No one
really had a specific area at first that needed to be tested. Angstrom pointed out that if
nothing stands out it seems we have been cycling through areas where cash is handled
based on how long it has been since it has been audited. Borawski asked Angstrom if there
are any areas I would look at more closely due to Mary Delai leaving. Angstrom stated she
would likely look at everything more closely with a new person in the role as Delai is a very
strong leader who seems to have a handle on all school financial issues. West stated maybe
it makes sense to look at something within the school. Berman stated that he had heard
from someone in the travel consulting field that it is common practice for there to be behind
the scenes kickback to teachers who are organizing student trips through a travel
consultant. Berman suggested that maybe that should be an area that is looked at.
Berman noted he had the engagement letter for the FY14 audit. Pacino made a motion to
accept the engagement letter, West seconded the motion. The Audit Committee voted to
accept the engagement letter (5 -0).
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West made a motion at 8:50 to adjourn seconded by Pacino. The Audit Committee voted to
adjourn (5 -0).
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