HomeMy WebLinkAboutOther Auditor Reports 12/31/2006CITY OF LINO LAKES, MINNESOTA
OTHER AUDITOR REPORTS
YEAR ENDED DECEMBER 31, 2006
CITY OF LINO LAKES, MINNESOTA
TABLE OF CONTENTS
DECEMBER 31, 2006
Page
Report on Internal Control over Financial Reporting
and on Compliance and Other Matters Based on an
Audit of Financial Statements Performed in Accordance
with Governmental Auditing Standards 1 -2
•- Report on Minnesota Legal Compliance 3
Other Required Auditor Communications 4 -6
Management Letter 7 -11
New Accounting and Reporting Standards 12
—
New Auditing Standards 15
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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
AND ON COMPLIANCE AND OTHER MATTERS BASED ON
AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Honorable Mayor and
Members of the City Council
City of Lino Lakes, Minnesota
We have audited the financial statements of the governmental activities, the business -type activities,
each major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota as
of and for the year ended December 31, 2006, which collectively comprise the City's basic financial
statements and have issued our report thereon dated May 30, 2007. We conducted our audit in
accordance with U.S. generally accepted auditing standards and the standards applicable to financial
audits contained in Govemment Auditing Standards, issued by the Comptroller General of the United
States.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the City's intemal control over financial reporting as
a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial
statements and not to provide an opinion on the internal control over financial reporting. Accordingly, we
do not express an opinion on the effectiveness of the City's intemal control over financial reporting.
Our consideration of the intemal control over financial reporting was for the limited purpose described in
the preceding paragraph and would not necessarily identify all deficiencies in intemal control over
financial reporting that might be significant deficiencies or material weaknesses. However, as
discussed below, we identified a certain deficiency in intemal control over financial reporting that we
consider to be a material weakness.
A control deficiency exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the City's ability to initiate, authorize, record, process, or
report financial data reliably in accordance with U.S. generally accepted accounting principles such that
there is more than a remote likelihood that a misstatement of the City's financial statements that is more
than inconsequential will not be prevented or detected by the City's intemal control over financial
reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the financial statements will not
be prevented or detected by the City's intemal control.
INTERNATIONAL
(1)
LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.
During the course of the audit, we identified and proposed journal entries related to the year -end close-
out process. The absence of a complete control procedure or process in this area is considered a
material weakness because the potential exists that a material misstatement of the financial statements
could occur and not be prevented or detected by the Citys intemal control processes
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City's financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on
the determination of financial statement amounts. However, providing an opinion on compliance with
those provisions was not an objective of our audit and, accordingly, we do not express such an opinion.
The results of our tests disclosed no instances of noncompliance or other matters that are required to
be reported under Govemment Auditing Standards.
We noted certain other matters that were reported to the management of the City in a separate letter
dated May 30, 2007.
This report is intended solely for the information and use of the City Council, Finance Committee,
management, the Office of the State Auditor, and federal awarding agencies and pass- through entities
and is not intended to be and should not be used byanyone other than these specified parties.
Austin, Minnesota
May 30, 2007
(2)
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REPORT ON MINNESOTA LEGAL COMPLIANCE
Honorable Mayor and
Members of the City Council
City of Lino Lakes, Minnesota
We have audited the financial statements of the governmental activities, the business -type activities,
each major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota as
of and for the year ended December 31, 2006, which collectively comprise the City's basic financial
statements and have issued our report thereon dated May 30, 2007.
We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards
applicable to financial audits contained in Governmental Auditing standards, issued by the Comptroller
General of the United States, and the provisions of the Minnesota Legal Compliance Audit Guide for
Local Govemment, promulgated by the State Auditor pursuant to Minnesota Statute 6.65. Accordingly,
the audit included such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.
The Minnesota Legal Compliance Audit Guide for Local Govemment covers seven main categories of
compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public
indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our
study included all of the listed categories.
The results of our tests indicate that, with respect to the items tested, the City of Lino Lakes, Minnesota
complied with the material terms and conditions of applicable legal provisions.
This report is intended solely for the use of the City of Lino Lakes, Minnesota, the Office of the State
Auditor, and other state agencies, and is not intended to be and should not be used by anyone other
than these specified parties.
Austin, Minnesota
May 30, 2007
Itt. A
INTERNATIONAL
LarsonAllen, LLP
(3)
LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.
INIME
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CPAs, Consultants & Advisors
www.larsonallen.com
OTHER REQUIRED AUDITOR COMMUNICATIONS
Honorable Mayor and
Members of the City Council
City of Lino Lakes, Minnesota
Dear Committee Members:
We have audited the financial statements of the governmental activities, business -type activities, each
major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota for the
year ended December 31, 2006, which collectively comprise the City's basic financial statements and
have issued our report thereon dated May 30, 2007. Professional standards require that we provide you
with the following information related to our audit.
Our Responsibility Under U.S. Generally Accepted Auditing Standards and Government Auditing
Standards
As stated in our engagement letter dated January 4, 2007, our responsibility, as described by
professional standards, is to plan and perform our audit to obtain reasonable, but not absolute,
assurance that the financial statements are free of material misstatement and are fairly presented in
accordance with U.S. generally accepted accounting principles. Because an audit is designed to
provide reasonable, but not absolute assurance and because we did not perform a detailed examination
of all transactions, there is a risk that material misstatements may exist and not be detected by us.
As part of our audit, we considered the intemal control of the City of Lino Lakes. Such considerations
were solely for the purpose of determining our audit procedures and not to provide any assurance
concerning such intemal control.
As part of obtaining reasonable assurance about whether the financial statements are free of material
misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations,
contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance
with such provisions.
Other Information in Documents Containing Audited Financial Statements
Our responsibility for other information in documents containing the City of Lino Lakes financial
statements, including the supplementary information, does not extend beyond the information identified
in our report on the financial statements, and we have no professional responsibility to perform audit
procedures on such other information.
INTERNATIONAL
(4)
LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.
Significant Accounting Policies
Management is responsibility for selection and use of appropriate accounting policies. In accordance
with the terms of our engagement letter, we will advise management about the appropriateness of
accounting policies and their application. The significant accounting policies used by the City of Lino
Lakes are described in Note 1 to the financial statements. No new accounting policies were adopted
and the application of existing policies was not changed during 2006. We noted no transactions entered
into by the City during the year that were both significant and unusual, and of which, under professional
standards, we are required to inform you, or transactions for which there is a lack of authoritative
guidance or consensus.
Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their significance
to the financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The most sensitive estimates affecting the financial statements were:
Estimated useful lives of depreciable capital assets - Management's estimate of useful lives for
depreciable assets is based on guidance recommended by authoritative accounting literature
and past experiences. The useful life of a depreciable asset determines the amount of
depreciation that will be recorded in any given reporting period as well as the amount of
accumulated depreciation that is reported at the end of a reporting period.
Estimated year -end valuation of investments at fair value — Management's estimate of the fair
value of investments is based on published market values at December 31, 2006.
Estimated current portion of compensated absences payable — Management's estimate of the
amount of the year -end compensated absences payable balance to be taken by employees
within one year of December 31, 2006 is based on historical trends and anticipated leave time
activity.
We evaluated the key factors and assumptions used to develop the above estimates in determining that
it is reasonable in relation to the financial statements taken as a whole.
Audit Adjustments
For purposes of this letter, professional standards define an audit adjustment as a proposed correction
of the financial statements that, in our judgment, may not have been detected except through our
auditing procedures. An audit adjustment may or may not indicate matters that could have a significant
effect on the City's financial reporting process (that is, cause future financial statements to be materially
misstated). We proposed audit adjustments during the course of our audit that were material to the
financial statements. In our judgment, the adjustments we proposed, whether recorded or unrecorded
by the City, either individually or in the aggregate, indicate matters that could have a significant effect on
the City's financial reporting process.
Management did not identify and we did not notify them of any uncorrected financial statement
misstatements.
(5)
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a matter,
whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing
matter that could be significant to the financial statements or the auditors' report. We are pleased to
report that no such disagreements arose during the course of our audit.
Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and
accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation
involves application of an accounting principle to the Citys financial statements or a determination of the
type of auditors' opinion that may be expressed on those statements, our professional standards require
the consulting accountant to check with us to determine that the consultant has all the relevant facts.
To our knowledge, there were no such consultations with other accountants.
Issues Discussed Prior to Retention of Independent Auditors
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not
a condition to our retention.
Difficulties Encountered in Performing the Audit
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We encountered no significant difficulties in dealing with management in performing our audit.
This report is intended solely for the use of the Finance Committee, City Council, and management of
the City of Lino Lakes and is not intended to be, and should not be used by anyone other than these
specified parties.
IMME
Austin, Minnesota
May 30, 2007
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LarsonAllen, LLP
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Lars•nAllen
CPAs, Consultants & Advisors
www.larsonallen.com
Honorable Mayor and
Members of the City Council
City of Lino Lakes, Minnesota
In planning and performing our audit of the financial statements of the City of Lino Lakes, Minnesota as
of and for the year ended December 31, 2006, in accordance with auditing standards generally
accepted in the United States of America, we considered the City's internal control over financial
reporting (intemal control) as a basis for designing our auditing procedures for the purpose of
expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on
the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the
effectiveness of the City's intemal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph
and would not necessarily identify all deficiencies in intemal control that might be significant deficiencies
or material weaknesses. In addition, because of inherent limitations in intemal control, including the
possibility of management override of controls, misstatements due to error or fraud may occur and not
be detected by such controls. However, as discussed below, we identified one deficiency in intemal
control that we consider to be material weaknesses.
A new audit standard, Statement on Auditing Standards 112 (SAS 112), Communicating Internal
Control Matters Identified in an Audit, is effective this year and states that "a control deficiency exists
when the design or operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect misstatements on a timely basis."
The standard further states, "a significant deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report
financial data reliably in accordance with generally accepted accounting principles such that there is
more than a remote likelihood that a misstatement of the entity's financial statements that is more than
inconsequential will not be prevented or detected by the entity's intemal control."
The new standard (SAS 112) further states that, "a material weakness is a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected by the entity's internal
control."
— Material Audit Adjustments - Internal Control over the Financial Reporting Process
Management is responsible for establishing and maintaining intemal controls, including monitoring, and
for the fair presentation in the financial statements in accordance with U.S. generally accepted
accounting principles.
Management is also responsible for the accuracy and completeness of all financial records and related
information. Their responsibilities include adjusting the financial statements to correct material
misstatements.
(7)
LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms.
INTERNATIONAL
As part of the audit, we proposed the following entries:
- Reclassify bond proceeds in the Water Fund.
Reclassify refunding debt service expenditures.
Adjust accrued interest payable in the Water Fund.
To record a delinquent special assessment receivable and offsetting deferred revenue.
To reclassify new bond issue costs and record 2006 amortization of bond issue costs in the
Water Fund.
To adjust net assets classification, Invested in Capital Assets Net of Related Debt in the
business -type funds.
The above entries relate to internal controls over the year -end close -out process. The absence of a
complete control procedure or process in this area is considered a material weakness because the
potential exists that a material misstatement of the financial statements could occur and not be
prevented or detected by the Citys intemal control processes.
During the course of our audit, several items came to our attention that we feel could be addressed by
the City of Lino Lakes to more efficiently run the City's operations or improve its intemal controls. We
herein submit the following suggestions to the City of Lino Lakes for their consideration.
Auditor Comments:
Capital Proiect Deficits
The financial statements for the capital project funds are presented in Statements 3, 5, 12 and 13 of the
2006 Annual Financial Report. As of December 31, 2006, three of the capital project funds have deficit
fund balances equaling a combined deficit of $783,556. This compares to five capital project funds with
a combined deficit fund balance of $859,840 as of December 31, 2005. We would like to recognize the
significant improvements made related to fund balance deficits over the past three years. Of the three
remaining funds with a deficit, one is very typical for any city operating a TIF fund (TIF 1 -11), one is
simply a timing difference between expenditures and the related MSA funding source (CSAG 14/8
Reconstruction Project), and the last has specifically been addressed by the Council and a plan is being
implemented to reduce the deficit over the near future (Dedicated Parks).
SAC Revolvin
The SAC Revolving Fund was established in 1990 to account for a refund from the MCES (formerly
MWCC) of past SAC charges which were paid by residents that had not hooked up to the sewer
system.
A summary of financial activity of this fund is as follows:
Revenue
SAC refund
Investment earnings
Total revenue
Expenditures:
Refunds
Prior
Years 2006 Total
$ 368,816 $ $ 368,816
263,155 15,657 278,812
631,971 15,657 647,628
$ 259,994 $ 334,244 594,238
Fund balance - December 31, 2006 $ 53,390
(8)
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During 2006, the City Council approved a policy to return SAC plus interest to all affected property
owners. Those property owners that have access to City sewer service may retum the refund to the City
provided they connect by December 31, 2007. The City will pay the SAC charge for those property
owners. Any such property owner not connected by the end of 2007 shall be refunded the unused SAC
plus interest after December 31, 2007. The SAC liability will be entirely abated by December 31, 2007.
Area and Unit Charge Fund
On January 11, 1988, the City Council approved Resolution 1 -88, which established the Area and Unit
Charge Fund for the City. The purpose of this fund is to collect various area and unit charges to be used
to meet debt payments. Before October 1 of each year, the City estimates the required transfer needed
to meet debt payments for the subsequent year. In December, these estimated amounts are transferred
to the various debt funds. We recommend that the City continue to closely monitor actual versus
projected area and unit assessment collections to assure that debt payment requirements will be met.
Designations of balances required for debt service is necessary to define discretionary construction
balances available to the City. The financing plan for the following bond issues have pledged area and
unit charges for the repayment of debt service:
• Improvement and Utility Bonds of 2004A
• Improvement Refunding Bonds of 1999A (Paid off in full during 2006)
• Water Revenue Bonds of 1999B
• Water Revenue Bonds of 1996B
The Improvement and Utility Bonds of 2004A have future debt service requirements (principal and
interest) totaling $1,633,469.
During 2006, a transfer of $359,680 was made to the Improvement Refunding Bonds of 1999A debt
service fund.
_ The Water Revenue Bonds of 1999B and 1996B have future debt service requirements totaling
$230,971 and $2,272,716 (principal and interest), respectively. The City annually transfers amounts
from the Area and Unit Charge Fund to the Water Fund sufficient to help cover the debt services of
these bonds. During 2006, a transfer of $299,725 was made to the Water Fund. It is the City's intention
to repay the Water Revenue Bonds of 1999B and 1996B with revenues of the Water Fund. If revenues
are not sufficient to meet the debt requirements, funds will be transferred from the Area and Unit Charge
Fund.
MEM
MEM
In addition to the transfers above, the Area and Unit Charge Fund transferred $121,000 to the
Improvement Refunding Bonds of 2003A Fund and $333,265 to the Improvement Bonds of 1998A for
debt service requirements.
DEBT SERVICE FUNDS
Debt service funds are a type of governmental fund used to account for the accumulation of resources
for the payment of principal and interest on general obligation debt (other than enterprise fund debt).
Debt service funds may have one or a combination of revenue sources pledged to retire debt including
property taxes, tax increments, special assessments and area and unit charges.
(9)
The diverse nature of the type of debt included in the same fund type requires careful analysis to
determine the adequacy of the fund balance and projected fund balance. The following schedule
extracts information from Exhibits 2 and 3 of the 2006 Annual Financial Report to assist in this analysis.
The following schedule compares outstanding debt with assets pledged for debt retirement. This
comparison provides a means to judge (at least on a preliminary basis) the financial position of each
individual debt service fund.
December 31, 2006 Deferred Total Remaining Over
Fund Deferred Tax Resources Debt Service (Under)
Fund Description Balance Revenue Total Levies Available Scheduled Funded
General Debt:
Certificates of Indebtedness
Lease Revenue Bonds of 1998A
Public Project Revenue Bonds 1999C
Tax Abatement Bonds 2006C
Utility Revenue Bonds 2006D
CIP Refunding Bonds 2006E
Special Assessment Debt:
Improvement Bonds of 2002A
Improvement Bonds of 2002B
Improvement Bonds of 2003A
Improvement Bonds of 20038
Improvement Bonds of 2004A
Improvement Bonds of 2005A
Refunding Imp. Bonds of 2005B
$ 99,567 $ 4,681 $ 104,248 $ 552,798 $ 657,046 $ 526,474 $ 130,572
429,172 5,424 434,596 495,057 929,653 942,093 (12,440)
342,770 2,062 344,832 334,079 678,911 422,689 256,222
70,926 70,926 3,826,438 3,897,364 3,712,810 184,554
51,608 141,334 192,942 192,942 716,286 (523,344)
50,549 50,549 4,094,370 4,144,919 3,929,300 215,619
$ 1,044,592 $ 153,501 $ 1,198,093 $ 9,302,742 $ 10,500,835 $ 10,249,652 $ 251,183
$ 434,031 $ 111,656
1,162,501 543,741
29,734 241,834
97,665 46,936
303,496 374,909
585,551 5,117,834
335,382 385,560
$ 2,948,360 $ 6,822,470 $
$ 545,687 $ 42,698 $
1,706,242 -
271,568
144,601 174,417
678,405 1,766,686
5,703,385 7,987,338
720,942 4,253,617
588,385
1,706,242
271,568
319,018
2,445,091
13,690,723
4,974,559
$ 387,334 $ 201,051
1,891,316 (185,074)
1,439,384 (1,167,816)
275,077 43,941
1,633,469 811,622
7,940,409 5,750,314
4,514,408 460,151
9,770,830 $ 14,224,756 $ 23,995,586 $ 18,081,397 $ 5,914,189
Note: Deferred revenue in the above table does not include the future scheduled "interest portion" of the
adopted assessment rolls. The 2004A Improvement Bonds also include a pledge from the Area and
Unit Fund that has not been included above.
The above table provides a means for the monitoring the status of the debt service funds. For the
General Debt funded solely by property taxes, it appears that there are adequate planned levies to retire
the debt when the future lease revenues scheduled to be received from the school district are included.
While in total the City has a surplus of total resources available over remaining scheduled debt service
based on the calculation above, certain individual funds are operating at a deficit. These deficits will
need to be funded by future adopted assessment rolls, special assessment levies, investment earnings,
transfers from other funds, property taxes or other available means.
Factors to consider when analyzing debt service funds:
• Are all the anticipated assessment rolls being adopted as soon as appropriate?
• Have all the planned financing sources been identified, such as pledged amounts from the area and
unit fund or future MSA funds?
• Are there significant "prepayments" received from property owners? In the current investment
environment, will the earnings the City will receive on these prepayments be lower than the interest
rate that was being charged on the adopted assessment roll?
The Area & Unit Fund is committed to the debt service of some special assessment bonds as well as
toward the water revenue bonds. The City's five -year operating plan addresses the above issues and
therefore, this comment is simplya reminder of the extent that repayment of certain debt is based on
pledged sources from the Area and Unit fund.
(10)
Budget Appropriations
Each year the City adopts an annual budget for the general fund. Each department receives an
appropriation based upon detailed budget estimates for individual expenditure accounts. Department
heads have the ability to transfer appropriations within a department. This can be helpful and improves
— flexibility in meeting department needs as they change during the year. However, such a policy can
lead to unnecessary or unauthorized expenditures. For example, equipment purchases.
We suggest the City review this policy and consider adding controls on the amounts that can be
transferred within a department without bringing it to the City Council for approval. These controls could
include dollar limits, restrictions on the types of purchases or getting the approval of someone in
— administration.
WENS
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Developer Escrow Accounts
The City maintains an Agency Fund to account for the activity related to developer escrows. It is our
understanding that developers deposit an escrow prior to a project beginning and that certain costs may
be applied against this escrow. We noted that there are several escrow accounts that carry a "negative"
balance (which represents an additional receivable balance from the developer) or have remained idle
from the prior year. Efforts were made during 2006 by the City to reconcile negative and idle accounts
with the related developers. We recommend that the City continue this process.
Conclusion
— We welcome the opportunity to discuss the points mentioned in this letter or any other accounting and
procedural issues in order to coordinate our efforts with you, the mutual objective being the
development of more effective accounting procedures for the City. We understand that some of the
— aforementioned points are in the process of implementation or may already have been implemented;
however, these points are noted so that effective follow -up can be accomplished.
We sincerely appreciate all the courtesies and cooperation extended to us by you and the staff of the
—
City, and thank you for the opportunity to be of service to you. We look forward to working with you in
the future.
Imo
■
This report is intended solely for the use of the Finance Committee, City Council, and management of
the City of Lino Lakes and is not intended to be, and should not be used by anyone other than these
specified parties.
Austin, Minnesota
May 30, 2007
Aer--400 1414'
LarsonAllen, LLP
New Accounting and Reporting Standards
Economic Condition Reporting – The Statistical Section (GASB Statements No. 44)
This statement is effective for periods beginning after June 15, 2005 and therefore, was implemented by
the City for the year ended December 31, 2006. The provisions of this statement significantly changed
the content and presentation of the information in the statistical section of the City's Comprehensive
Annual Financial Report (CAFR).
Other Post - Employment Benefits (GASB Statements No. 45)
In the past, most governmental employers offering post employment benefits accounted for them on a
pay -as- you -go basis. However, the Governmental Accounting Standards Board (GASB), in July 2004,
issued Statement No. 45, Accounting and Financial Reporting by Employers for Post employment
Benefits Other Than Pensions, which will make the pay -as- you -go accounting for these benefits a "thing
of the past ".
Why the change in position by the GASB, you ask? The answer is less than nebulous— frequency of
occurrence, significance, and disparity. Post employment benefits have become more prevalent in the
governmental arena as a means of attracting and retaining talented employees, as a result of
legislation, or a combination of the two. Post employment benefits may also comprise a significant cost
to the employer, especially if the benefits involve providing healthcare coverage after separation from
active employment. Further, these benefits represent a form of compensation, the cost of which should
be recognized over the period of time that an employee earns the benefit. Disparity in practice
developed as some governmental employers simply followed the pay -as- you -go accounting whereas
others opted to report an accrual -basis liability on their financial statements by following the provision of
Financial Accounting Standards Board Statement No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, which applies to the private sector.
Several bridges must be crossed on the path to adopting GASB Statement No. 45. First, the other post
employment benefits or "OPEB" benefits must be identified. Simply speaking, OPEB benefits under the
context of the new GASB standard are in essence any type of benefit provided to an employee over a
period of time after their separation from service, not necessarily retirement, and obviously not limited to
healthcare benefits.
Another important aspect is determining the "substantive plan ". The substantive plan is the employers'
and the employees' mutual understanding of the OPEB benefit, not necessarily what is written down. In
fact, the OPEB plan may not have been previously written down at all! Then one must determine
whether the substantive plan is a defined contribution plan or a defined benefit plan:
• a defined contribution OPEB plan, under GASB Statement No. 45, is "....plan having terms that
(a) provide an individual account for each plan member and (b) specify how contributions to an
active plan member's account are to be determined, rather than the income or other benefits the
member or his or her beneficiaries are to receive at or after separation from employment." This
is similar to a 401(k) plan or a 403(b) plan.
(12)
Now
Other Post - Employment Benefits (GASB Statements No. 45) (Continued)
• conversely, a defined benefit OPEB plan is one "...having terms that specify the benefits to be
provided at or after separation from employment. These benefits may be specified in dollars (for
example, a flat dollar payment or an amount based on one or more factors such as age, years of
service and compensation), or as a type or level of coverage (for example, prescription drugs or
a percentage of healthcare insurance premiums)."
The third step is determining the OPEB liability. The OPEB liability for a defined contribution is simply
the unpaid contractually required payment, similar to an unpaid invoice. On the other hand, the OPEB
liability for a defined benefit pension plan is the cumulative unpaid or unfunded annual required
contribution or "ARC ", which will require an actuarial analysis.
For a defined benefit OPEB plan, the manner of funding the OPEB liability is an important consideration.
Under the new GASB standard, an OPEB liability will only be considered as funded to the extent that
assets are transferred to an irrevocable trust for the specific benefit of plan members (i.e. covered
employees) and their beneficiaries. Assets held in an irrevocable trust can be reported in fiduciary
financial statements and thus excluded from the employers' government -wide financial statements.
Employer assets that are simply "earmarked" to provide for OPEB benefits but that could otherwise be
re- directed to other uses are not considered by the GASB as funding of the OPEB liability. Therefore,
these earmarked assets continue to be reported in the government -wide financial statements. Said
another way, if the intended assets are not held in an irrevocable trust, the OPEB plan is considered
unfunded.
Recognizing the complexity of the new requirement, the GASB allowed for a phased -in implementation
depending on the employers' size. For instance, the effective date for implementing the OPEB standard
is for the first fiscal year beginning after December 15, 2006, 2007 or 2008 depending on whether an
employer was a phase 1, 2, or 3 implementer of GASB Statement No. 34, respectively. Based on this
schedule, implementation for the City would be required for the year ended December 31, 2008.
Given the time allowed before the required implementation dates, there are some important actions and
considerations that employers should initiate. First, the employer will need to understand the substantive
plan, and would be far the wiser to get it in writing as a formal plan agreement. Qualified and reputable
attomeys may need to be engaged for this task. Second, if the OPEB benefit is structured as a defined
benefit plan, as opposed to a defined contribution plan, the employer in all likelihood will need to engage
an independent actuary to measure the liability. Once the attomeys and the actuaries are engaged, the
employer would be wise to study several ad -hoc scenarios —for example, changing assumptions for
contribution rates, discount rates, demographics of the covered employee group, duration of coverage,
prospective vs. retroactive implementation, etc. —and evaluate the effects on their financial statements.
While Statement No. 34 was the most significant accounting standard to be issued by the GASB in the
last 20 years, Statement No. 45 is a close second. However, the GASB has allowed a generous
amount of time before the required implementation date. Use it wsely!
Net Assets Restricted by Enabling Legislation (GASB Statements No. 46)
This statement is effective for periods beginning after June 15, 2005 and therefore, was implemented by
the City for the year ended December 31, 2006. The provisions of this statement require that limitations
on the use of net assets imposed by enabling legislation be reported as restricted net assets.
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Accounting for Termination Benefits (GASB Statements No. 47)
The Governmental Accounting Standards Board (GASB) has issued Statement No. 47, Accounting for
Termination Benefits, to provide accounting guidance for state and local governmental employers
regarding benefits (such as early- retirement incentives and severance benefits) provided to employees
that are terminated. Statement No. 47 requires recognition of the cost of involuntary termination benefits
in the period in which a government becomes obligated to provide benefits to terminated employees,
which is not necessarily the same period as when the benefits are actually provided.
The Statement requires recognition of the cost of voluntary termination benefits when the termination
offer is accepted. The Statement provides an exception to the general recognition requirements for
termination benefits that affect defined benefit post employment benefits, such as pensions or retiree
healthcare. Those termination benefits should be accounted for in the same manner as defined benefit
pensions or other post employment benefits, although any increase in an actuarial accrued liability
associated with a termination benefit is required to be separately disclosed.
The Statement also elaborates on how to measure the cost of termination benefits and requires
disclosure of information about termination benefit arrangements, including a description of the plan and
the cost of the benefits.
Statement No. 47 is effective for financial statements for periods beginning after June 15, 2005.
However, for termination benefits that affect defined benefit post employment benefits other than
pensions, governments should implement Statement No. 47 simultaneously with Statement No. 45,
Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions.
Sales and Pledges of Receivables and Future Revenues and Intra - Entity Transfers of Assets and
Future Revenues (GASB Statements No. 48)
This statement is effective for periods beginning after December 15, 2006 and therefore, is applicable to
the City for the year ended December 31, 2007. This statement clarifies accounting treatment for
transactions involving the exchange of an interest in expected receivable or future revenue collections
for immediate cash payments.
Accounting and Financial Reporting for Pollution Remediation Obligations (GASB Statements
No. 49)
This statement is effective for periods beginning after December 15, 2007 and therefore, is applicable to
the City for the year ended December 31, 2008. GASB Statement No. 49 requires governments to
measure and report liabilities and expenditures resulting from pollution remediation obligations. The new
standard is applicable to all pollution remediation except as associated with the following:
Environmental obligations associated with landfills which are already covered under GASB
Statement No. 18: Accounting for Municipal Solid Waste Landfill Closure and Post - closure
Care Costs.
Future pollution remediation activities that are required when an asset is retired except for
newly retired assets where no liability has previously been recognized.
Asset impairments which are already covered under GASB Statement No. 42: Accounting
and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries.
Any pollution prevention costs, fines, penalties, or any other non - remediation expenditures.
Accounting for any environmental non - exchange transactions.
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VEIN
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Accounting and Financial Reporting for Pollution Remediation Obligations (GASB Statements
No. 49) (Continued)
Expenditure recognition or asset capitalization occurs when one of the following five obligating events
takes place:
The government is compelled to take pollution remediation action because of an imminent
endangerment.
The government violates a pollution prevention related permit or license.
The government is named, or evidence indicates that it will be named, by a regulator as a
responsible party or potentially responsible party for remediation, or as a government
responsible for sharing costs.
The government is named, or evidence indicates that it will be named, in a lawsuit to compel
participation in pollution remediation.
The government commences or legally obligates itself to commence pollution remediation.
Costs of remediation should be accrued for all components (legal fees, site investigation costs, etc.) of
the obligation that are reasonably estimable. The standard outlines a method for recording a liability
based on estimated future remediation payments (expected cash flow technique = sum of all probability
weighted amounts in a range of possible estimated amounts). The liability should be reduced by any
estimated insurance or other recoveries that are not yet realized or realizable. An asset should be
reported separately for any known insurance or other recoveries that are already realized or realizable.
If liability recognition is necessary, it is required to be recorded at current value versus estimated future
inflating factors for such criteria as unknown technologies, laws or regulations. This liability amount is
carried forward unchanged until one of the five benchmarks occurs, there is a change in the remediation
plan, or there is a change in operating conditions.
Additional footnote disclosures accompanying recognition of a liability include explaining the nature and
source of the remediation obligation as well as the methods and assumptions used to estimate the
liability.
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NEW AUDITING STANDARDS
There are two key new auditing standards that became effective for periods ending after December 15,
2006 and therefore, were applicable to this year's audit. All public accounting firms must comply with
these standards, as issued by the American Institute of CPAs, when performing audits. Several of the
requirements contained in these new standards significantly impacts the manner in which your audit is
conducted and, potentially, on its costs and findings. In an effort to serve you better and continue to gain
efficiency and understanding in the audit process, we have outlined some of the changes and their
impact on your audit.
STATEMENT OF AUDITING STANDARDS (SAS) 103: AUDIT DOCUMENTATION
This standard addresses the format and content of the auditors' workpapers, documentation procedures
and results. While you may not see these changes yourself, they will affect the time and effort we must
put into your audit. You can help mitigate the effect of this standard on your organization with up -front
planning and communications.
• First, the standard tells us that: `The auditor's report should not be dated earlier than the
date on which the auditor has obtained sufficient appropriate audit evidence to
support the opinion." On the surface, this requirement does not seem much different from
existing requirements; however, it has practical implications. A delay between the end of
audit fieldwork and approval of draft financial statements can result in a change in the report
date and require additional audit steps, such as updating attomey letters, reviewing
additional board minutes and interim financial statements, extending subsequent receipts
and disbursements testing, etc. for the intervening period. These additional steps would also
be required if a significant adjustment were to be made to the financial statements, or
information required in the footnotes were to be provided, after the initial fieldwork date.
Specific Impact: The audit report date we used for the 2005 audit under the old standards
was March 24, 2006, or essentially the last day of our on -site fieldwork. Under the new
standard, the 2006 audit report date is May 30, 2007. The impact on the audit is a
requirement to update certain procedures through this additional two months period between
our March fieldwork and audit report date.
• Second, we must now "lock down" audit files within 60 days of the issuance of the audit
report. This will make workpapers inaccessible for changes. Practically, this means that late
management responses can also cause the report date to change when they are
incorporated into Single Audit findings or management letter comments, with similar
implications for additional audit procedures and billings.
The audit documentation requirements of SAS 103 may reinforce the common perception that auditors
ask the same questions and make the same requests multiple times over the course of an annual audit
engagement. The purpose of follow -up requests, however, are designed to affirm representations and
ensure the completeness of the audit evidence documentation though our report date.
SAS 103 encourages the auditor to corroborate oral representations by client management. Auditors will
obtain audit evidence through inquiries of additional personnel and /or written documentation. Therefore,
accessibility and responsiveness of all staff to auditor inquiries will be necessary to have an efficient
audit. Corroborating information often resides outside the accounting office. For example, information
obtained through direct inquiry of non - finance office personnel.
Avoiding the effect of additional audit fees, the disruption associated with additional audit procedures
and further report delays that may result due to lack of audit staff available to perform the unanticipated
procedures requires clear communication of changes in audit circumstances and meeting schedules to
all parties (auditor, management and audit committee)well in advance of audit wrap -up.
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MERE
SAS 112: COMMUNICATING INTERNAL CONTROL RELATED MATTERS NOTED IN THE AUDIT
This standard includes new language and definitions with which you will need to become familiar. The
standard replaces "reportable conditions" and "management points" with new terms as follows:
• Control Deficiency — "A control deficiency exists when the design or operation of a control
does not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis."
• Significant Deficiency — "A significant deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process
or report financial data reliably in accordance with GAAP such that there is more than a remote
likelihood that a misstatement of the entity's financial statements, that is more than
inconsequential, will not be prevented or detected by the entity's intemal control."
In other words, judging the impact of control deficiencies, singularly or collectively, could rise to
such a level that, in the auditor's judgment, possible misstatements could occur in the financial
statements.
• Material Weakness — "A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a material misstatement
of the financial statements will not be prevented or detected by the entity's intemal control."
In other words, depending upon the qualitative analysis of the significant deficiencies above on
the financial statements, as well as the number of such items encountered, any or all of the
above could rise to the level of material weakness.
You will note that these new definitions are broader and more inclusive than the previous
"reportable conditions" and "material weakness" that were reported to you under SAS 60.
Additionally, and perhaps most importantly to you, our communication of significant deficiencies and
material weaknesses must be in writing. Verbal communications of deficiencies will not be acceptable.
This means, these items must be included in our "management letter" (formerly SAS 60 report), which
state agencies and other constituents often request.
Nothing in the new standards precludes the auditor from orally communicating additional items that
he /she believes to be of potential benefit to management, such as recommendations for operational or
administrative efficiency or improvement in internal controls. If management responses are included in a
management letter, we will add a disclaimer according to the appropriateness or accuracy of the
response.
Remember, auditor awareness of control deficiencies varies with each audit and is influenced by the
nature, timing, and extent of audit procedures performed, as well as other factors from one year to the
next. Therefore, taking corrective action for all of one year's findings does not guarantee that new
exceptions will not present themselves the following year, even though financial procedures and
controls may not have changed.
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