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HomeMy WebLinkAbout2022-05-23 RMLD Audit Committee Minutesorq ^�GEiV-- e. Town of Reading r04b',CL Meeting Minutes R'='�0!t�dG. MA 0 1*r 2613 JUN Board - Committee - Commission - Council: 20 P„ 44 RMLD Audit Committee Date: 2022-05-23 Time: 6:00 pm Building: Reading Municipal Light Building Location: Winfred Spurr Audio Visual Room Address: 230 Ash Street Session: Open Session Purpose: Review of RMLD 2021 Audit Version: Final Findings Attendees: Members - Present: RMLD Board of Commissioners: Philip Pacino, Vice Chair, Sub -Audit Committee Chair, Robert Coulter, Commissioner. Town of Reading Audit Committee: Jeanne Borawski, Acting Chair, Finance Committee; Shawn Brandt, ; Stephen Herrick, Carla Nazzaro, Members - Not Present: Town of Reading Audit Committee: Edward Ross, Finance Committee; Mark Dockser, Select Board. Others Present: RMLD Staff: Coleen O'Brien, General Manager; Hamid Jaffari, Director of Engineering and Operations; Wendy Marklewicz, Director of Business & Finance; Gregory Phipps, Director of Integrated Resources; Janet Walsh, Director of Human Resources; Erica Morse, Executive Assistant. Presenter: Zachary Fentross, CPA, Audit Manager, Melanson. Minutes Respectfully Submitted By: Philip B. Pacino Topics of Discussion: Call Meeting to Order Mr. Pacino called the RMLD Board of Commissioners (BoC) Sub -Audit Committee meeting to order at 6:00 PM. Chair Borawski called the Town of Reading Audit Committee meeting to order at 6:00 PM. Opening Remarks and Introductions Chair Borawski asked all attendees to identify themselves. Mr. Brandt, Mr. Haley, and Ms. Angstrom attended remotely. Presentation of 2021 Financial Audit Findinas Zackary Fentross, CPA, Melanson, presented the 2021 Financial Audit findings. Key points included: RMLD had positive operating results, a well -funded OPEB (Other Post -Employment Benefits), and there was no management letter. RMLD received a clean opinion with no exceptions, consistent with prior years. Page I 1 • The Management's Discussion and Analysis section offers a narrative summary of operational results and major financial areas. • Mr. Fentross discussed the statement of net position, which was presented on a comparative basis, and highlighted the changes between 2020 and 2021. • Unrestricted cash and short-term investments decreased by $3.3 million, due to the use of operating funds for capital improvements in 2021. • Capital assets net of accumulated depreciation increased by $3.3 million, largely due to capital improvements made in 2021, which were funded through operating cash rather than bonding. • Mr. Fentross provided examples of various capital Improvements in 2021 and emphasized that the two largest were overhead and underground conductors. • The net pension liability was largely unchanged from the prior year and represents RMLD's proportional share of the total unfunded liability for the Reading Contributory Retirement System, which is about 79% funded. • Mr. Fentross discussed the pension trust, which was dissolved in January 2022, and noted that this will result in a swing between restricted and unrestricted cash next year. • Mr. Fentross discussed the net OPEB liability (essentially health insurance), which decreased by $3 million from 2020 due to a change In benefit terms. This change allowed the actuary to reduce RMLD's long-term liability. • RMLD's OPEB liability is 55% funded, which is a good financial position compared to other towns and cities. • Mr. Fentross addressed a question concerning the rationale and consequences of the benefit term change, explaining that it pertains to Part A and Part B premiums, resulting in an increased liability for the Town. Ms. Angstrom further clarified that the change is due to Individuals over 65 who were on the Blue Cross Blue Shield plan being transitioned to the more cost-effective Medicare supplement. • In response to Chair Borawskl's query about when RMLD can expect to fully pay off the OPEB and Pension Trust liabilities, Ms. Angstrom indicated that the Pension Trust's target date has been extended from 2029 to 2030, and the OPEB is likely to follow a similar timeline, as RMLD is currently ahead of schedule. • Mr. Fentross presented the Statement of Revenues, Expenses, & Change In Net Position on a comparative basis, emphasizing the increase in purchase power expenses and the decrease in operating expenses. • Purchase Power increased by 3 million dollars, due to RMLD making a concerted effort to Increase their energy buying portfolio to contain more non -carbon resources (wind, hydro etc.), which are more expensive than carbon resources. • Mr. Fentross noted that the increase in purchase power expenses was offset because power supply is a pass-through charge to the rate payers. • Operating expenses decreased by 2.3 million dollars, due to the decrease in the OPEB liability. Fentross noted that this decrease is slightly misleading. When there is a change in benefit terms, the associated income statement Impact for that Item hits within 1 year. Although there appears to be a decrease, operating expenses were about the same as last year. Page 1 2 • Mr. Pacino raised a point regarding purchased power and Renewable Energy Certificates (RECs), confirming that when RMLD sells RECs, the purchased power number is reduced. • Mr. Fentross clarified that a REC is acquired when RMLD purchases renewable energy, and the department can either sell or retire the certificates. Currently, there Is no accounting treatment for RECs, and they have always been recorded as a reduction in purchased power expenses. RMLD's REC holdings as of December 31, 2021, are not recognized as an asset, and their valuation is only noted in the financial statement footnotes on pages 39 and 41. • Mr. Coulter emphasized that this situation applies to anyone purchasing RECs, not just RMLD, as it is an industry-wide practice. • The discussion clarified that the credits on the statements represent the selling of RECs. Mr. Herrick inquired about RECs, and Mr. Phipps explained RMLD's process of retiring and selling RECs according to Policy 30 to meet 2021 Climate goal targets. Mr. Phipps emphasized that to avoid rate shock, RMLD retires certificates at a level of 23% of annual 2021 kWh sales, with the retirement level Increasing by 3% annually through 2030. • Chair Borowski confirmed that RECs are solely an asset with no liability, and Phipps noted that they have a shelf life, as they must be transacted, retired or sold, within six months of year end. • Mr. Pacino mentioned that GASB Is working on a research project for an accounting standard related to RECs. Mr. Pacino also asked Mr. Fentross if he had more information about the Environmental Social Governance reporting and International Sustainability Standard Board. • Mr. Fentross responded that he was unaware of both and would provide more Information to the Boards later. • Mr. Fentross discussed the change In net position, essentially RMLD's net income, noting that the Department of Public Utilities (DPU) guidelines state that any MA Light Department cannot make more than 8% of their capital assets each year. Melanson calculated the net income for CY21 at a 4.26% rate of return, well below the 8% limit. • The requirement of 8% of net plant applies specifically to RMLD only. A question arose regarding the consequences of exceeding 8% of net plant. Mr. Fentross explained that occasional exceedances would not cause Issues, but consistent violations could result in the DPU inquiries to RMLD. • Ms. Markiewicz mentioned that RMLD had previously exceeded the 8% limit and had allocated the excess funds to the rate stabilization fund. Mr. Pacino added that during the 1990s, excess funds were returned to the ratepayers. • Mr. Fentross confirmed that RMLD has good internal controls in place and assets are being appropriately safeguarded. Mr. Fentross thanked the RMLD staff and General Manager for their efficient work and well-maintained records. • Mr. Fentross mentioned that any areas of improvement would be recommended in a formal management letter, which the RMLD has not received in ten years. Approximately only 10% of Melanson clients do not receive a management letter, putting RMLD in high esteem. Page 1 3 • Mr. Pacino referenced the Governmental Accounting Standard Board (GASB) issuing Statement No. 87 Leases, which the Department will be required to Implement next year. • Mr. Fentross clarified that GASB No. 87 pertains to situations where RMLD serves as both lessee and lessor. In some cases, RMLD may lease out to others or lease from others. As a result, new liabilities and assets may appear on the balance sheet next year in connection with GASB 87. • Mr. Fentross pointed out that situations where RMLD Is a lessor should be considered, particularly in cases where RMLD rents pole space to companies like Verizon. This could lead to a new asset for RMLD if there is a 20-30 year agreement to utilize RMLD poles. • Mr. Coulter asked whether this Issue was already addressed under state law. • Mr. Fentross responded that, from an accounting perspective, it was not. Government accounting typically lags a few years behind commercial practices, and the reporting requirement will not be finalized until next year. • Mr. Herrick confirmed that RMLD has no debt and noted that it is a capital -Intensive organization with significant projects on the horizon, such as the new substation. He asked how often companies like RMLD operate without debt and whether this is a positive attribute or indicative of missed opportunities. • Mr. Fentross stated that one or two Municipal Light Plants (MLPs) audited by Melanson have no debt, while the majority of other MLPs have some debt on their books. He could not determine If this was good or bad, as it Is a management decision, and he needs to maintain independence. Mr. Fentross suggested consulting with an expert who could better advise on the advantages and disadvantages of debt. • Ms. Markiewicz explained RMLD's strategy regarding debt, emphasizing that RMLD has not needed to issue bonds and that the associated interest from bonding could become a burden for customers. • Chair Borawski inquired about the liquidation of the pension trust fund. Fentross replied that it would occur In 2022. Currently, the $5.5 million from the pension trust fund is listed under noncurrent assets, restricted cash, and short-term investments. Next year, the funds will move to current assets, unrestricted cash, and short -tens Investments. • Chair Borawski asked why the pension trust fund was being treated differently. Ms. Markiewicz responded that It was based on legal advice. RMLD was informed that the trust was no longer necessary and the funds are now considered operating expenses. • The below -the -line payment to the Town of Reading was discussed. Ms. Markiewicz explained that, prior to 2018, the payment was calculated based on the Consumer Price Index (CPI) percent change for the year. In 2019, the Board directed RMLD to make payments from the available below -the -line unappropriated earned surplus for calendar years 2019 and 2020 at the rate currently in place for FY39. In 2020, the Board of Commissioners (BoC) voted to extend the 2020 payment for the dates of June 30, 2021, and December 31, 2021. In a separate vote, the BoC decided to change the calculation to 3.875 mils/kWh based on the previous 3 -year average of kWh sales from audited financial statements, beginning with the payment date of June 30, 2022. • Mr. Pacino added that using the CPI formula was not sustainable in the long run, as RMLD would eventually need to draw from capital funds, harming the system. The Page 14 new formula provides a better balance. • Mr. Pacino made a motion, seconded by Mr. Herrick, that the Town of Reading Audit Committee recommend to the RMLD Board of Commissioners to accept the audit dated May 23rd, 2022. Motion Carried: 5:0:2 (5 in favor, 2 absent). Roll Call: Jeanne Borawski, Aye; Shawn Brandt, Aye; Stephen Herrick, Aye; Carla Nazzaro, Aye; Philip Pacino, Aye. Edward Ross and Mark Dockser were absent from the meeting. • Mr. Pacino made a motion, seconded by Mr. Coulter, that the RMLD Board of Commissioners Sub- Audit Committee recommend to the RMLD Board of Commissioners to accept the audit dated May 23rd, 2022. Motion Carried: 2:0:0 (2 in favor). Roll Call: Philip Pacino, Aye; Robert Coulter, Aye. Adiournment Mr. Pacino made a motion, seconded by Mr. Coulter, to adjourn the RMLD Board of Commissioners Sub- Audit Committee. Motion Carried: 2:0:0 (2 in favor). Roll Call: Philip Pacino, Aye; Robert Coulter, Aye. Mr. Pacino made a motion, seconded by Mr. Herrick, to adjourn the Town of Reading Audit Committee meeting. Motion Carried: 5:0:2 (5 in favor, 2 absent). Roll Call: Jeanne Borawski, Aye; Shawn Brandt, Aye; Stephen Herrick, Aye; Carla Nazzaro, Aye; Philip Pacino, Aye. Edward Ross and Mark Dockser were absent from the meeting. The meeting adjourned at 6:47 PM. Materials Town of Reading, Massachusetts, Reading Municipal Light Department, Annual Financial Statement for the Year Ended December 31, 2021. All meeting materials can be found on the RMLD website (www.rmld.caW in the BoC meeting packet. As approved on June 15, 2023 Page 1 5