1. FGFOA Webinar May 16, 2013

2. Financial Condition Assessment Procedures Repeat Findings Audit Report Review Reminders Auditor General Local Government Audits 2

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4. Background History GASB 34 Economic Condition What is it? Aspects of economic condition Research Purpose Academic and Inquiries What are other states doing? Recommendation New Indicators Implementation 4

5. History Created in 1999 14 Indicators recommended by Task Force Calculated based on financial and non-financial data (population, millage rates, and taxable property values) Trend analysis (5 year) Benchmark comparisons Auditors may incorporate into their assessment of financial condition pursuant to Section 218.39(5), F.S. 90 local governmental entities were reported as experiencing deteriorating financial conditions for the 2010-11 fiscal year 5

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15. GASB statement No. 34 Issued June 1999 Effective date In three phases based on a governments total annual revenues, with periods beginning after June 15, 2001 and continuing through periods beginning after June 15, 2003 Main Features: Management’s discussion and analysis (new) Government-wide financial statements (new) Fund statements (improved) Budgetary comparison (improved) Note disclosure (new and improved) Almost 10 years since effective implementation 15

16. A government’s ability to generate enough cash over thirty to sixty days to pay its bills A government’s ability to generate enough revenues over its normal budgetary period to meet its expenditures and not incur deficits A government's ability in the long run to pay all the costs of doing business A government’s ability to provide services at the level and quality that are required for the health, safety, and welfare of the community and that its citizens desire 16

17. Considerable variation in definitions Confusion regarding terminology – financial position versus financial condition versus financial health, and so on… GASB developed a comprehensive concept of government financial health called economic condition 17

18. Economic condition is a composite of a government’s financial health and its ability and willingness to meet its financial obligations and commitments to provide services. Economic condition includes three components: Financial position Fiscal capacity Service capacity 18

19. Financial position is the status of a government’s assets, liabilities, and net asset accounts displayed in its basic financial statements Fiscal capacity is a government’s ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they come due Service capacity is a government’s ongoing physical ability and willingness to supply the capital and human resources needed to meet its commitments and provide services 19

20. 20 Conceptual View Fund Balance/Net Assets Surplus and deficits Revenues and revenue base Expenses/Expenditures and spending pressures Debt/Liabilities and debt service Pension and OPEB Liquidity Common-size ratios Financial position Liquidity/Solvency Fiscal Capacity Risk and exposure Other (includes pension and OPEB) Indicators View

21. Current AG indicators address most of the aspects of economic condition; however, for purposes of the local government financial condition assessment procedures located on our website, the term financial condition is defined as: “A local governmental entity’s ability to meet its financial obligations and provide services that are required for the health, safety, and welfare of the community, and that its citizens desire.” 21

22. Purpose To determine how and if the existing example indicators used in the financial condition assessment procedures system located on the Auditor General’s Web site should be revised, removed, or updated In doing so, we explored: Assessment procedures implemented/recommended by others (other states, GASB, ICMA, and academia) Government-wide financial statements and note disclosures General fund specific Pension and OPEB Collection of data easy and consistent 22

23. Academic and inquires Subsequent to issuance of GASB Statement No. 34 there has been little academic research using government- wide financial statements information. Credit analysts tend to focus on specific areas of interest they are evaluating and not the entire government. For example, someone at Moody’s looking at sewer bond issues doesn’t really focus on, nor make decisions based on, the government-wide data. 23

24. Academic and inquires (cont.) Dean Mead (GASB, An Analyst’s Guide to Government Financial Statements, 2 nd edition) Suggestions for economic condition analysis Applicable ratios relating to financial position, fiscal capacity, and service capacity Pension and OPEB information 24

25. What are other states doing? Fund financial statement data is commonly used for indicators, with only a few states incorporating government-wide financial indicators Financial indicators that relate specifically to the general fund are widely used Most states collect data similar to the AFR process used by the FDFS Data is usually on a detailed code level than would be presented on the financial statements and is usually unaudited, but reviewed. 25

26. Based on the research, the example indicators located on our website, which can be used to make preliminary financial condition assessments, are still commonly used in ICMA, GASB, and other state models. 26

27. New Indicators Government-wide Change in Net Assets (Net Position) Capital Asset Condition General Fund Fund balance as a % of expenditures Quick ratio Pension and OPEB Funded Ratio 27

28. Change in Net Assets / Beginning Net Assets Government-wide statement of activities (governmental activities) The percent change in net assets indicates how the government's position changed during the year (positive or negative) as a result of resource flow This ratio includes the affects of changes in long-term assets and liabilities, capital outlay and other financing sources and uses 28

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31. Accumulated Depreciation/Depreciable Capital Assets Notes to the financial statements Governmental type activities and proprietary type activities separately Indicates the percentage of assets depreciated. Trend analysis and benchmark comparisons can indicate whether or not an entity is systematically investing in capital assets. 31

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34. Unassigned and Assigned Fund Balance/Total Expenditures General fund on the fund financial statements Creates a common-size ratio out of financial position Could indicate a government’s ability to handle general fund emergencies and unanticipated needs Current AG indicator is combined for all funds except for special revenue funds 34

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38. Cash and Investments/Current Liabilities – Deferred Revenues General fund on the fund financial statements Liquidity ratio Indicator of a government’s ability to meet current obligations Current indicator is for all governmental and proprietary funds separately Deferred revenues are generally in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period 38

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41. Funded Ratios for Pension and OPEB Plans Pension Plans – defined-benefit plans Pension Plans – separate indicators for general employee (includes FRS), police, fire, and combined plans Increasing concern for pension and OPEB plans The schedule of funding progress expresses the actuarial value of pension plan resources as a percentage of the actuarial accrued liability Pension Plans – Update indicator in the future for GASB Statement No. 68 41

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44. Available for 2013 FYE audits Website Updates Example Financial Condition Assessment Procedures Assessment Tools (e.g. spreadsheets, graphs, appendixes) Data Collection 2009 – 2012 44

45. Reorganized to match flow of data in audit reports 45

46. Reorganized to match flow of data in audit reports (cont.) 46

47. Reorganized - logical order 47

48. Reorganized - logical order (cont.) 48

49. Repeat Findings 49

50. Section 218.39(8), Florida Statutes 50 Local Government Accountability  Requires AG to notify Legislative Auditing Committee (LAC) of any audit report that indicates an entity has failed to take full corrective action in response to a recommendation that was included in the two preceding audit reports. LAC may direct the governing body to provide a written statement explaining why full corrective action has not been taken or describing the corrective action to be taken and when it will occur. If LAC determines that written statement is not sufficient, it may require the governing body’s chair or designee to appear before it. If LAC determines that the entity failed to take action for which there is no justifiable reason for not taking action, or failed to comply with LAC requests, it may act pursuant to Section 11.40(2), FS.

51. EntityNumber of LettersDate of Letters Due Date for Response Universities43/13/20136/1/2013 Colleges53/13/20136/1/2013 District School Boards334/2/20136/10/2013 Charter Schools244/3/20136/3/2013 Counties: BOCCs23 4/11/20136/17/2013 Clerks of Circuit Court104/5/20136/17/2013 Property Appraisers114/5/20136/17/2013 Sheriffs194/5/20136/17/2013 Supervisor of Elections144/5/20136/17/2013 Tax Collectors124/4/20136/17/2013 Municipalities1534/22-25/20137/10/2013 Special Districts1355/3/20137/17/2013 Source: Legislative Auditing Committee 51

52. 52 Audit Report Review

53. Reminders from the Audit Report Reviewers 53  Management must respond to all findings included in the audit report package, including those in the report on compliance and internal control, management letter, and including prior year audit findings.  When there is a pension trust fund in the audit, the types of investments allowed in the various pension plans must be disclosed. Referencing to s. 218.415, FS, is not applicable since this law does not apply to pension investments.  Auditors must identify those findings that are being reported for the 3 rd consecutive audit.

54. Proposed Rule Change for 9/30/13 Audits 54  Audit findings contained in reports, schedules, and management letters must include reference numbers.  Proposed new language: “If an audit finding in the preceding financial audit report is uncorrected, the auditor must determine whether the finding was also included in the second preceding fiscal year financial audit report. Uncorrected findings in the current fiscal year audit report must cite the finding reference numbers used in the preceding and, as applicable, the second preceding fiscal year financial audit reports.”

55. Auditor General Local Government Audits 55

56. How Do Auditor General LG Audits Come About? 56  Citizen petition – municipalities  Request by local government  Direction by Legislative Auditing Committee  Auditor General’s own authority

57. What Are Some Recent Auditor General LG Audits? 57  2013-102 – Economic Development Activities Administered by the Hardee County Industrial Development Authority, Hardee County Economic Development Authority, and Hardee County Board of County Commissioners, and Other Administrative Matters  2013-093– City of Hollywood and Hollywood Community Redevelopment Agency  2013-085 – Okaloosa County Board of County Commissioners’ Oversight of the Tourist Development Council and Use of Tourist Development Taxes and Funds

58. What Special LG Audits Have Been Performed in the Recent Past? (Cont’d) 58  2013-001 – City of Lake Worth Sub-regional Sewer System  2012-169– Islamorada, Village of Islands  2012-081 – Assessment, Collection, and Remittance of Court-Related Fines, Fees, and Other Charges, and Selected Reporting of Court-Related Activities By Clerks of the Circuit Courts

59.  Okaloosa County Board of County Commissioners and Clerk of the Circuit Court  South Florida Workforce Investment Board  Delray Beach Community Redevelopment Agency  City of Starke  City of Hampton  Sunshine Water Control District 59

60. 60 What types of problems have been noted in Auditor General local government audits?

61. Inadequate separation of duties Insufficient expertise to perform duties competently Training not provided as necessary High turnover, exit interviews 61

62. Lack of written policies and procedures  Should clearly define responsibilities  Help ensure: Adequate internal controls Compliance with applicable laws  Assists in training new employees 62

63. Fraud Budgets Collections Capital Assets Payroll Processing Personnel Administration Risk Assessment Procurement Disbursements Grant and Contracts Administration Travel Vehicle Usage 63

64. Budget adoption Ordinance or Resolution? All funds included? Prior year balances included? Budget amendment Budgetary control 64

65. Legal level of budgetary control Adopted Budget Statutory or Other Legal Requirements Governing Board Policy Budget comparison 65

66. Untimely bank account reconciliations Inadequate bank account reconciliations Checks used out of sequence Unexplained/unsupported reconciling items Stale-dated checks not reported/remitted Unclaimed property per Chapter 717 Must report, remit moneys, to FDFS by May 1 each year for checks outstanding over 12 months Penalty 66

67. Bank transfers No written contract No approvals necessary No dollar amount limit on transfers No limit as to where funds can be transferred 67

68. No G/L control accounts Not reconciled to subsidiary records No subsidiary records Kept by audit firm Inadequate Capital Assets records Sufficient information missing (property #, serial #, location, etc.) Some property not included on TPP records Records not updated for deleted items 68

69. TPP items not tagged or marked Noncompliance with Chapter 274, FS or Department of Financial Services Rule 69

70. No written policies and procedures Did not determine amount needed Did not explore various financing options Pay-back period Financing costs Did not consider refinancing when advantageous Exceeded debt capacity 70

71. Grants Grant funds not expended within term of grant Failure to timely apply for extensions Failure to Separately Account for Grant Expenditures Donations Not recorded Not recorded at fair value 71

72. Bond covenant restrictions Use of proceeds contrary to authorizing documents Required reserves not maintained Dedicated taxes, fees and assessments Undocumented use of employee time Loaned for other purposes Expenditures of interest did not follow principal uses 72

73. Receipts control No pre-numbered receipts Untimely Deposits No reconciliation of receipts to deposits/licenses or permits issued No security over cash collections Charges to customers Contrary to State Law Not approved by governing body – Utility rate changes Not timely collected 73

74. Hiring practices No verification of employment history & education No background checks Compensation No legal authorization Employee Compensation Plan Salary advances (article VII, s. 10, constitution) Employee bonuses Severance pay 74

75. Compensation (continued) Independent contractor vs. employee Council/Commission Members are employees 24-hour use of vehicles Moving expenses Travel allowances 75

76. Legal Not in accordance with purchasing policies Public purpose Food/entertainment Flowers Employee Christmas celebrations Retirement gifts Adequacy of documentation Invoices/receipts missing Lack of proper approvals prior to purchase 76

77. Credit card payments Inadequate controls over use Unreasonable credit limits No credit limits physically set on card Personal charges not reimbursed Cost Allocations Methodology used not systematic or rational Inadequate documentation to support methodology used Estimates used not adjusted based on actual (e.g., costs, time) 77

78. Solicitation or acceptance of gifts Doing business with one’s agency (related parties) Unauthorized compensation Misuse of public position Conflicts of employment or contractual relationship Employees/advisory board members as independent contractors Hiring relatives Supervising relatives Internal Audit reporting to management Audit Committee members 78

79. Noncompliance with s. 112.061, FS or policy established Inadequate documentation No indication of departure/arrival times No receipts for out-of-pocket expenses Reimbursement for meals provided at conferences Travel allowances not supported by typical travel 79

80. Competitive selection procedures not used Auditing services Legal services Engineering services Bond-related services No written contracts 80

81. Inadequate contracts Lack of specificity as to services to be provided No due date for services to be provided Payment terms not dependent on receipt of services Inadequate payment documentation Receipt of deliverables not documented Out-of-pocket expenses not supported Amounts paid not in accordance with contract terms 81

82. Evaluating financial condition Trend analysis Benchmark comparison Contributing factors to deteriorating financial condition Lack of cash flow analysis or forecasting Lack of short and long-term plans Control deficiencies Lack of interim reports 82

83. Beau Brooks: beaubrooks@aud.state.fl.us Mike Gomez: mikegomez@aud.state.fl.us Web site: www.myflorida.com/audgen E-mail: flaudgen_localgovt@aud.state.fl.us Headquarters: 111 West Madison Street Room 401 Pepper Building Tallahassee, FL 32399-1450 Phone: (850) 487-9031 Fax: (850) 487-4403 83